U-Turn Valuations, Insider Trading Yield Adviser SEC Sanctions

by Dorsey & Whitney LLP
Contact

The valuation of assets held by advisers has been a key issue for the Commission. Likewise, insider trading on political intelligence is also a focus of SEC Enforcement. The Commission’s latest case involving an adviser involves each of these key areas and culminates with the adviser withdrawing its registration. In the Matter of Visium Asset Management, L.P., Adm. Proc. File No. 3-18473 (May 8, 2018).

Visium was a registered investment adviser with more than $7.8 billion of assets under management. Two related investment vehicles were involved here: Visium Credit Master Fund, LT. – the Credit Fund – and Visium Balanced Master Fund Ltd. – the Balanced Fund. Credit Fund Series A investors paid a 1.5% management fee and a 1.5% performance fee. Series B investors paid a 2% management fee and a 20% performance fee based on a high-water mark and the fund’s NAV.

In May 2009 the adviser launched the Credit Fund. It focused on higher risk investments such as thinly traded corporate debt instruments issued by healthcare companies. Those bonds and loans were not listed on an exchange. They did trade over the counter where market makers provided price quotes.

From July 2011 to December 2012 portfolio managers Christopher Plaford and Stefan Lumiere engaged in a mismarking scheme to falsely value certain securities held by the Credit Fund and improperly inflate the NAV and apparent performance. Sham price quotes were used to override those which should have been used by Credit fund’s independent administrator.

The sham quotes were obtained by the two portfolio managers from at least three outside brokers, each of whom was at a different firm. The two men made the sham quotes appear legitimate by asking the brokers involved in the practice for specific prices they wanted in an email or instant message sent back to them. The brokers would then send back what were called U-turn quotes.

During the eighteen months this practice was used, the Credit Fund had, on average, about 72 bond or loan positions at month-end. The U-turn prices were used for anywhere from 6 to 28 positions. Virtually all of the U-turn prices resulted in higher valuations for long positions or lower valuations for short positions held by the Credit Fund. The scheme caused the Credit Fund to routinely overstate its month-end NAV by amounts which ranged from 2.4% to 7.2%. As a result of this practice investors purchased and sold interests at incorrect prices. It also resulted in the Credit Fund over paying its performance fees by $2,622,709 and its management by $544,700.

The improper valuations also resulted in deceptive disclosure to investors. FASB Accounting Standards Codification Topic 820 regarding fair value has a three tier framework for measuring fair value based on the quality of the inputs used. Since Mr. Platford used the sham quotes to keep the values at Level 2 for those where quotes were not available but fair value could be determined, it was incorrect. The scheme also resulted in misstatements about the performance of the Fund, the limited partner’s total capital, net investment income and monthly and yearly returns as well as Visium’s firm-wide assets under management. Likewise, the scheme was contrary to the disclosed valuation methods and the firm’s policies and procedures.

The two portfolio managers also engaged in an insider trading scheme. Initially, between 2005 and 2011 there was considerable speculation as to whether the Office of Generic Drugs or OGD at the Federal Food and Drug Administration would approve pending enoxaparin applications or Abbrevited New Drug Applications. During the period Gordon Johnston, a former OGD official retained by Visium, furnished information that certain applications were moving to approval. As that information was transmitted regarding an application for Momenta Pharmaceuticals, Inc. the Balance Fund traded in advance of the announcement. Mr. Johnston continued to furnish information on the applications that was used to formulate the Balanced Fund’s trading before the announcement on an application by Watson Pharmaceuticals, Inc. This resulted in trading profits of $6,982,396.

The Balanced Fund and the Credit Fund also traded on inside information obtained by CMS in May 2012 from consultant David Blaszczak. Mr. Blaszczak, a former Centers for Medicare and Medicate Services or CMS employee, was convicted of illegal tipping in connection with another insider trading case centered on inside information he obtained from CMS in April, 2018. This resulted in trading profits of $284,939. While the firm had an insider trading policy it was not effectively implemented since inadequate steps were taken to monitor employee communications with consultants.

The Order alleges violations of Securities Act section 17(a), Exchange Act section 10(b), and Advisers Act sections 204A, 206(1), 206(2), 206(4), and 207. To resolve the proceedings Respondent undertook to return all investor funds no later than one year from the date of the Order and filed a Form ADV-W to withdraw its registration as an investment adviser. Respondent also consented to the entry of a cease and desist order based on the sections cited in the Order as well as a censure. The firm will pay disgorgement of $4,755,223 and prejudgment interest of $720,711. In addition, Respondent will pay a penalty equal to the amount of the disgorgement. See also In the Matter of Steven Ku, Adm. Proc. File No. 3-18474 (May 8, 2018)(proceeding against CFO for failure to supervise two portfolio managers re valuation; resolved with the suspension of Respondent from the securities business for a period of twelve months and the payment of a $100,000 civil penalty).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.