Weinstein's Saba Accused by Pension of Mismarking Bonds

  • Canadian pension suit claims hedge fund was `shortchanging' it
  • New York firm says securities pricing was `fair and accurate'

One of the biggest former investors in Boaz Weinstein’s Saba Capital Management LP accused the $1.6 billion hedge fund of “shortchanging” it by mismarking bond holdings before returning its money.

Canada’s C$112 billion ($84 billion) Public Sector Pension Investment Board sued Saba in New York state court on Friday, saying the firm “artificially manipulated” the value of its investment by marking down a significant portion of the fund’s portfolio after the retirement plan asked for all its money back, only to boost the value of the assets the following month.

The lawsuit is another setback to Weinstein, 42, the former co-chief of Deutsche Bank AG’s credit business, who posted three straight years of losses before making 5.2 percent this year through August. Assets at New York-based Saba, which Weinstein started in 2009, have slumped more than two-thirds from a peak of $5.5 billion three years ago and some senior partners have left the firm.

Saba called the suit meritless and “looks forward to vindicating its position in court,” Jonathan Gasthalter, a spokesman for the firm at Sard Verbinnen & Co., said in an e-mailed statement.

Industry Standard

The difference in value at issue amounts to only 2.6 percent of pension’s former investment with Saba, according to the hedge fund. The two securities were priced using an industry-standard, competitive process that was carefully vetted by at least four external advisers, the firm said.

The Montreal-based pension board, which oversees the retirement savings of Canadian federal public servants, said it was the Saba Offshore Feeder Fund’s largest investor, having invested $300 million in February 2012 and $200 million more the following year.

The board said it asked to redeem from Saba early this year after the fund’s net asset value had slumped to $1.5 billion by mid-2014. That decline appeared to be “unrelated to any market development that could or should have adversely affected the fund’s performance had the fund been properly managed,” according to the suit.

The pension board, represented by law firm Skadden, Arps, Slate, Meagher & Flom LLP, said it asked Saba for its money back at the end of the first quarter after the fund couldn’t explain why it had suffered losses, and rejected a request to return its capital in three installments to keep other investors from finding out.

At the time, Saba held McClatchy Co. bonds that were hard to sell, according to the suit. The pension fund claimed that Saba changed the way it priced the debt before it returned the money. Normally, the hedge fund would use independent pricing services or brokers who regularly traded the bonds and had valued them at 50 cents to 60 cents on the dollar.

‘Materially Depressed’

Instead, the retirement plan said Saba used a different process, which “purportedly produced materially depressed bids,” pricing the bonds at 31 cents as of March 31. Within a month, Saba returned to its usual pricing methodology and the bonds were marked in the 50s, the pension plan said.

“They did so to stanch further investor defections from the fund and to directly benefit themselves by boosting the residual value of their investments in the fund and other affiliated hedge funds with exposure to the same bonds,” according to the suit. The pension plan is asking for unspecified compensatory damages and disgorged profits.

Saba said that, contrary to the pension board’s claims, it didn’t use the “bid wanted in competition” pricing process only for a single month and for purposes of the redemption, but continued to use it as appropriate in the second and third quarters. The results of the pricing process were accepted by the pension more than 90 percent of the time, for dozens of securities, according to Saba.

The hedge fund firm also said it took great care in redeeming the pension’s investment “on a timetable dictated by PSP, including by finding fair and accurate market prices for extremely illiquid positions.”

Saba invests in securities including convertible bonds, closed-end funds and stock indexes. The hedge fund in March posted its worst performance ever, slumping 6.3 percent, then rebounded to make 10 percent in April, its biggest gain, according to a client letter.

The case is Public Sector Pension Investment Board v. Saba Capital Management LP, 653216/2015, New York State Supreme Court, New York County (Manhattan).

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