Visium Insider-Trading Scheme Brought Down by Mismarking Tipby , , , and
Former fund manager helped FBI investigators over two years
Cooperater could get financial reward for helping SEC probe
What turned into one of the biggest insider-trading cases at a hedge fund in recent years started out as something entirely different: a probe into whether some portfolio managers at Visium Asset Management were mismarking securities and inflating returns.
Investigators found that was true -- one former money manager pleaded guilty June 9 and is cooperating, while another is fighting the case. They also found a more insidious plot: Visium partner Sanjay Valvani was paying a former Food and Drug Administration official to tap a colleague, still at the FDA, for an inside line on generic drug approvals.
Valvani denies the allegations. The former FDA official, Gordon Johnston, pleaded guilty June 13 to passing insider information. Even though Visium isn’t accused of wrongdoing, the firm, which once managed $8 billion, is essentially out of business as a hedge fund manager. It said on June 17 that it’s selling one fund and shutting the rest.
The firm will liquidate the main Balanced Fund, as well as its Institutional Partners Fund, Equity Alpha Fund and Equity Alpha UCITS Fund, according to a letter to investors. Its multi-sector hedge fund is being sold to AllianceBernstein LP. As of last year, Visium managed five hedge funds and a mutual fund, and was seeking to raise $500 million for a private equity vehicle. The letter didn’t discuss the private equity fund.
While investigators won’t comment on where the tip about the mismarking came from, a footnote in a criminal complaint against former Visium portfolio manager Stefan Lumiere detailed how an unidentified cooperating witness received immunity for helping to build the mismarking case against him. The cooperator’s assistance “could indirectly result in a financial benefit,” according to the footnote. That language is typical in describing a whistle-blower. The Securities and Exchange Commission can reward such assistance, if it leads to a successful case, with awards ranging from 10 to 30 percent of penalties over $1 million.
Another former Visium fund manager, Christopher Plaford, pleaded guilty to mismarking and insider trading, based on tips allegedly provided by Valvani. In his plea, Plaford said he began mismarking some illiquid bonds in his fixed-income fund in 2011. His crimes couldn’t save the fund, which shut down in 2013. A year later, Plaford began helping the government.
As FBI agents unraveled the mismarking scheme, they won the cooperation of witnesses who detailed other frauds to use government contacts to get inside information, according to a person familiar with the matter. In addition to the FDA information, they uncovered a plot in which Plaford traded on illegal tips from a former Centers for Medicare and Medicaid Services official who’d become a political consultant, according to the person, who asked not to be named because details of the probe aren’t public.
"I strongly suspected but did not confirm that this information had been improperly obtained by a paid consultant from an FDA insider," Plaford said, according to a transcript of his guilty plea unsealed last week. Plaford said he was aware the drug consultant was paid by Visium for his tips.
The FDA insider, Johnston, spent 12 years at the agency, rising to deputy director of the Office of Generic Drugs. He left in 1999 and joined the Generic Pharmaceutical Association as a vice president. He’s also cooperating with prosecutors and said Valvani hired him to provide “political intelligence” on the progress of generic drug applications through his former office at the FDA.
Johnston duped a close friend at the FDA to give him inside information on applications by Momenta Pharmaceuticals Inc. and others to make copies of Sanofi’s blood-thinning drug Lovenox. When Johnston learned in January 2010 that the FDA was moving toward approving a generic Lovenox, he said he passed the information to Valvani.
Visium used the tip to buy $35 million in Momenta shares and $43 million in credit-default swaps that hedged against a potential drop in Sanofi shares, according to prosecutors. When the FDA approved Momenta’s application in July 2010, Visium made $25 million by selling its Momenta shares and closing its Sanofi short positions, according to prosecutors. An FDA spokeswoman declined to comment on the case.
The credit health-care fund Plaford managed got off to a strong start when it opened in 2009, jumping 32 percent according to an investor report. Performance fizzled in subsequent years and led to the fund’s closure in 2013.
During the fund’s final two years, Plaford engaged in the mismarking with Lumiere, who worked for him, and traded on tips supplied by Valvani, prosecutors said.
The U.S. investigation is continuing. Valvani is free on a $5 million bond, and Lumiere, who also denies any wrongdoing, was released on a $1 million bond. After pleading guilty on June 9, Plaford was released without posting bail.
Valvani’s “investment decisions were always based on rigorous and entirely appropriate research and analysis, consistent with his high integrity,” his lawyer Barry Berke said June 15.