Articles Posted in Hedge Funds

According to Bloomberg, US prosecutors are conducting a criminal probe into whether hedge funds inflated the value of bonds to enhance the fees they were paid. Sources told the news media outlet that prosecutors want to know whether hedge funds solicited fake price quotes from brokers, which would have let the funds artificially raise the value of illiquid securities in their portfolios.

Just this week, a witness in the residential mortgage-backed securities fraud criminal trial against three ex-Nomura Holdings Inc. traders—they are accused of lying about RMBS prices to clients—stated under oath that he had given a Premium Point Investments LP trader fake quotes. The witness, ex-broker Frank DiNucci Jr., claims that two of the defendants, Michael Gramins and Ross Shapiro, are among the ones that trained him to lie to customers about bond prices. DiNucci, who pleaded guilty to fraud and conspiracy and making misrepresentations,previously worked at Nomura. He also worked at Auriga USA LLC and AOC Securities LLC.

Because certain securities are hard to price, hedge funds depend on brokers and third parties for estimates and quotes to determine how to value debt. Holding artificially inflated securities in the portfolios can allow a hedge fund to tout a better performance and get paid more for performance and management fees. It also allows them to conceal when some holdings do poorly.

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Judge Orders Deutsche Bank Subsidiary to Pay $150Mfor Libor Rigging
A federal judge is ordering Deutsche Bank Group Services, a subsidiary of Deutsche Bank (DB), to pay $150M for its involvement in an interest rate manipulation scam. The London unit pleaded guilty last year to rigging the London Interbank Offered Rate benchmark.

The fine comes two years after Deutsche Bank settled Libor rigging allegations with US and British regulators for $2.5B. According to prosecutors, derivatives traders at the German bank and at other banks colluded together to manipulate LIBOR rates to preference their trading positions.

Libor rigging allegations are not the only claims that Deutsche Bank has been contending with. Recently, the German Bank reached a $7.2B settlement with the US DOJ over its part in the 2008 global financial crisis. Meantime, NY and British officials ordered Deutsche Bank to pay $630M in fines because of alleged money laundering that occurred in Russia.

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Morgan Stanley Ordered to Pay $70M for Tax-Reporting Errors
In its yearly regulatory filing, Morgan Stanley (MS) announced that it took a $70M charge because of tax-reporting mistakes made by its brokerage business from ’11 to ’16. The firm is talking to the Internal Revenue Service to settle any client tax underpayments. Morgan Stanley said that some of its wealth management clients that may have overpaid taxes as a result of these errors and they would be paid back.

The firm also announced that it might sustain a $221.3M loss because of a lawsuit brought by Salzburg, the Austrian state, over commodities derivatives and fixed-income transactions between ’05 and ’12. Salzburg claims that Morgan Stanley did not having the authority or ability to make such deals—a contention that the latter disputes.

Trading Firm Accused of Manipulating US Markets
According to a complaint brought by the US Securities and Exchange Commission, Avalon FA manipulated the US markets on hundreds of thousands of occasions, allegedly making over $21M in a layering scam. The regulator obtained an asset freeze against the Ukrainian trading company.

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The trial in which a number of hedge funds and creditors are partly blaming PricewaterhouseCoopers for the collapse of MF Global is about to begin in U.S. District Court in New York. The plaintiffs, alleging malpractice involving “erroneous accounting advice,” are seeking over $3B in damages. Former MF Global CEO Jon Corzine, also an Ex-Goldman Sachs (GS) co-chairman and formerly both a New Jersey governor and US senator, is expected to testify in court.

MF Global, once a global financial derivatives broker, is no longer in business. The firm failed in 2011 after customers left when they learned that Corzine had placed big bets on European sovereign debt during a volatile time for the markets. This caused a $1.6B shortfall in client accounts.

Yet, because MF Global employed repo-to-maturity instruments to bet on the debt, this let the firm report the bets as gains, which enhanced the way its revenue looked. Also, clients’ funds were commingled with MF Global’s funds even though they should not have been mixed together.

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Massachusetts Secretary of the Commonwealth William Galvin has filed a securities fraud complaint against MC2 Capital. The state regulator is accusing the Boston-area hedge fund of running a Ponzi scam involving three hedge funds: the MC2 Capital Partners Fund, the MC2 Capital Value Partners Fund, and the MC2 Canadian Opportunities Fund. Alleged victims included a local institutional investor that invested $2M.

Galvin has taken action to bar the three MC2 Capital funds along with their fund operator Yasuna Murakami, from engaging in further securities business in Massachusetts. Murakami purportedly took more than $15M from over 45 investors.

He allegedly used investors’ money pay for luxury hotels, alcohol, specialty cars, and other personal expenses. The MC2 Capital Partners Fund, which was the original fund and founded in 2007, was marketed primarily to friends and family. Within a year of operation, however, the fund’s balance was negative and investors’ equity was erased.

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Ex-Visium Fund Manager on Trial for Bond Fraud
Jury selection is scheduled to begin this week in the criminal trial against Stefan Lumiere, an ex-Visium Asset Management LP portfolio manager. Lumiere, who managed the Visium Credit Opportunities Fund, is accused of falsely inflating the value of securities in a fund and committing bond fraud.

Visium Asset Management LP is a New York based-hedge fund. The $8B investment hedge fund shut down in 2016 after a criminal investigation that led to charges against a number of people, including Sanjay Valvani, who  killed himself several months ago following allegations of insider trading.

According to prosecutors, from ’11 to ’13, Lumiere was among a number of people who conspired to bilk investors through the mismarking of securities’ values that were in a fund that invested in healthcare company-issued debt. The prosecution believes that the alleged misconduct caused the net asset value of the fund to be overstated by tens of millions of dollars monthly. Meantime, investors were fooled into thinking the bonds were very liquid even though they were illiquid.

Lumiere pleaded not guilty to securities fraud, conspiracy, and wire fraud charges last year.

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This week, the authorities arrested hedge fund founder Mark Nordlicht and several others over allegations that his Platinum Funds was involved in a $1B ponzi scam that defrauded over 600 investors. They also are facing civil charges brought by the US Securities and Exchange Commission. This is the largest Ponzi scam since the collapse of Bernard Madoff’s multi-billion dollar scheme that bilked investors of $50B.

According to the SEC, it discovered suspect activity during a probe of Platinum Partners and its flagship hedge fund advisory firms, Platinum Management LLC and Platinum Credit Management LP. The firms and Nordlicht are accused of inflating asset values, illicitly moving investor funds to conceal liquidity issues and losses, giving redemptions to the investors whom they favored, overstating the value of one oil company that was a huge asset, and making misrepresentations to bring in new investors during what internally was referred to in documents as a “Hail Mary Time.”

The SEC is accusing Nordlicht of colluding with two colleagues and an executive at Black Elk Energy, which is the funds’ oil investment, to divert nearly $100M from that company to give a “boost” to the Platinum funds. He and others allegedly manipulated a key vote to support Platinum’s position. Also, to meet investor redemption requests, the defendants allegedly took out high-interest rate loans, commingled money within the funds, and improperly raised funds from new investors.

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A San Francisco-based hedge fund advisory firm has agreed to settle U.S. Securities and Exchange Commission charges alleging its failure to notice that one its employees was engaged in insider trading. Artis Capital Management will disgorge the more than $5.1M  in illicit rating profits made by employee Matthew G. Teeple for the firm plus over $1.1M of interest. The hedge fund firm will also pay a more than $2.5M penalty.

According to the regulator, Artis Capital did not maintain policies and procedures adequate enough to prevent insider trading from taking place at the firm. The Commission contends that Teeple’s supervisor, Michael W. Harden, did not respond as needed when red flags arose to indicate that Teeple was engaging in wrongful behavior.

To settle the SEC charges against him, Harden will pay a $130K penalty and serve a 1-year suspension from the securities industry. He and Artis Capital consented to the regulator’s order. However, they did not deny or admit to the Commission’s findings.

NY Hedge Fund to Pay $413M to Settle Civil and Criminal Charges Over FCPA Violations
Och-Ziff Capital Management Group has settled both criminal and civil charges accusing the New York hedge fund of paying bribes to obtain business in Africa. This is the first hedge fund to face punishment over violating the Foreign Corrupt Practices Act. 
 
As part of its settlement with the SEC, Och-Ziff will pay almost $200M to the Commission. Meantime, the hedge fund’s CEO, Daniel S. Och, will pay the regulator almost $2.2M to resolve charges accusing him of causing certain violations. CFO Joel M. Frank also agreed to settle the SEC the charges against him and will pay a penalty. 

The Wall Street Journal and other media are reporting that Theranos is now the defendant of a securities fraud lawsuit brought by one of its major investors. The plaintiff is San Francisco hedge fund Partner Fund Management, which is one of the blood testing company’s largest financial backers.  Partner, which brought its case in the Delaware Court of Chancery, is seeking damages beyond its investment and costs related to the lawsuit.
Although the complaint is under seal, Partner has confirmed that it has brought a legal case against the beleaguered blood testing company. According to a letter, which the hedge fund sent to investors, Theranos took part in “lies, material misstatements, and omissions” to persuade Partner to invest in the company. The letter notes that Theranos CEO/founder Elizabeth Holmes and ex-President Sunny Balwani are also defendants in the case.
 
Partner Fund believes that Holmes was deceptive when claiming that Theranos’s proprietary technologies were working and close to receiving regulatory approvals. Meantime, Theranos has stated that it would combat the securities fraud lawsuit. 
 

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