Visium Jury Told Bond Trader Lied to Boost Fund’s Numbersby
Stefan Lumiere goes on trial as U.S. says he cheated investors
Former junior trader taped ex-colleagues, will testify
U.S. prosecutors said portfolio manager Stefan Lumiere cheated investors at Visium Asset Management LP by inflating the value of distressed-debt holdings in the hedge fund’s credit portfolio, as his securities’ fraud trial began Wednesday.
"For years, Lumiere corrupted the valuation process at his hedge fund to make the results look better than they were,” Assistant U.S. Attorney Damian Williams said in opening statements. Investors “trusted Lumiere to do right by them, to play it straight. Instead of being honest, Lumiere lied.”
Lumiere is accused of ripping off investors from 2011 to 2013. He and his colleagues got brokers to furnish sham quotes for the securities hundreds of times, allowing them to override the valuations of the fund’s independent administrator, Morgan Stanley, prosecutors said.
The inflated valuations generated more than $5.9 million in extra fees for the firm and juiced the bonus pool for executives, according to the U.S. The credit fund, which oversaw $470 million, wound down in 2013 after a wave of investor redemptions.
One such example was Visium’s holdings in ATI Enterprises, a troubled for-profit education company. Williams said ATI debt was was trading at $7.50 per loan, but that Lumiere valued the holding at $79 per loan, a 953 percent markup that improved the firm’s position by $11.2 million.
"It’s easy to look like a winner if you can just make up the score," Williams said.
Authorities were tipped off after a former junior trader at the firm, Jason Thorell, told them of the scam and agreed to wear a wire to record conversations with colleagues and supervisors. It mushroomed into a broader probe of insider trading on tips about pending regulatory decisions about health-care policy. Prosecutors said Visium reaped more than $32 million from trades on drug companies.
Defense lawyer Eric Creizman urged jurors to be skeptical of a U.S. case that hinges on the word of Lumiere’s ex-boss, who has already pleaded guilty, and a government informant who stands to make “six figures” under a U.S. whistle-blower program for every successful criminal and civil case.
The prices Lumiere asked brokers to confirm were quoted to him by his supervisor, and he had no reason to believe they were fraudulent, Creizman said. He said Lumiere had no incentive to juice asset valuations and never received additional bonuses as a result.
Thorell’s testimony is likely to loom large. Prosecutors portrayed him as a conscientious trader who reported the misconduct to his superiors and authorities. But court filings suggest he was an active participant in the scam.
“The government’s investigation from the start has been infected by a self-described master manipulator,” Creizman said. “Mr. Lumiere believed in good faith that these prices he wanted the brokers to confirm were correct, reasonable and justifiable.
"Stefan Lumiere is innocent of the charges against him."
Lumiere, whose sister was once married to the firm’s founder, Jacob Gottlieb, is the only remaining defendant in the case. Another Visium portfolio manager, Christopher Plaford, pleaded guilty, and the most senior executive to be charged, Sanjay Valvani, committed suicide days after he was indicted. Thorell, who will testify for the government, stands to receive a payout under the Securities and Exchange Commission’s whistle-blower reward program.
Visium, which once managed $8 billion, notified investors and clients of the investigation in March and wound down operations after the charges were filed in June, liquidating some funds and selling another to AllianceBernstein Holding LP.
Jurors on Wednesday heard from the government’s first witness, David Keily, Visium’s general counsel. He testified that Lumiere signed the company’s compliance policy saying employees had a "fiduciary duty to place the interests of Visium advisory clients above the interests of Visium and Visium employees." The policy also required employees to accurately value securities held in the firm’s funds.
Keily also testified that while a trader could override asset valuations, "it should be exceptional -- that was, uncommon. Not the rule."
The case is U.S. v. Lumiere, 16-cr-00483, U.S. District Court, Southern District of New York (Manhattan).