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Sec Enforcement News: Disclosure Violations And Insider Trading

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  • Posted on: May 16 2018

The Securities and Exchange Commission (“SEC”) has been busy so far this month. In the latest roundup, this Blog looks at three enforcement actions taken by the SEC against hedge funds and advisers involving fraud and insider trading.

Hedge Fund Advisory Firm Settles Charges Related to Asset Mismarking and Insider Trading

On May 8, 2018, the SEC announced (here) that New York-based Visium Asset Management LP (“Visium”), a hedge fund advisory firm, agreed to settle charges related to asset mismarking and insider trading by its privately managed hedge funds and portfolio managers.  Visium’s CFO also agreed to settle charges that he failed to respond appropriately to red flags that should have alerted him to the asset mismarking.

According to the SEC’s cease-and-desist order (the “Order”) (here), Christopher Plaford (“Plaford”) and Stefan Lumiere (“Lumiere”), portfolio managers employed by Visium, falsely inflated the value of securities held by hedge funds Visium advised, causing the funds to falsely inflate returns, overstate their aggregate net asset value, and pay approximately $3.15 million in excess fees to Visium. The SEC also found that certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration (“FDA”).  The trades were based on confidential information received from a former FDA official working as a paid consultant to Visium.  Trades were also made in the securities of home healthcare providers in advance of a proposed cut to certain Medicare reimbursement rates by the Centers for Medicare and Medicaid Services (“CMS”), based on confidential information received from a former CMS employee working as a paid consultant to Visium.

In a separate order (here), the SEC found that Visium’s CFO, Steven Ku (“Ku”), failed to supervise Plaford and Lumiere by not responding appropriately to red flags that should have alerted Ku to their misconduct.

The SEC previously charged Plaford and Lumiere, and the former FDA official, among others, for their misconduct, in an enforcement action filed in June 2016.  The former CMS employee was charged for other misconduct in May 2017.  Earlier this year, the SEC barred Lumiere from the securities industry based on a final judgment entered against him in the SEC’s case as well as his conviction in a parallel criminal case.  The SEC’s case against Plaford had been stayed pending the completion of a parallel criminal case.

“Advisory firms must create a culture of zero tolerance when it comes to unlawful conduct, and supervisors at those firms must take reasonable measures necessary to detect and prevent securities law-related violations by their personnel,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Here Visium’s portfolio managers engaged in illegal asset mismarking and insider trading, and Ku failed to act in the face of red flags that should have exposed the asset mismarking scheme.”

In the settlement, Visium agreed to disgorge illicit profits totaling more than $4.7 million, plus interest of $720,711, and pay a penalty of more than $4.7 million.  Ku agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months.  Visium and Ku each consented to the applicable SEC order without admitting or denying the findings.

Registered Municipal Advisor and Its Owner Settle Charges Relating to Alleged Fraud in Connection with Multiple Municipal Bond Offerings

On May 9, 2018, the SEC announced (here) that it charged a registered municipal advisor and its owner with defrauding a south Texas school district in connection with multiple municipal bond offerings.

In the order instituting proceedings (here), the SEC found that in connection with three municipal bond offerings for a local school district in South Texas, Mario Hinojosa (“Hinojosa”) and his wholly-owned municipal advisor, Barcelona Strategies LLC (“Barcelona Strategies”), misrepresented their municipal advisory experience and failed to disclose conflicts of interests to their client.  According to the SEC, while working as a paralegal, Hinojosa set up Barcelona Strategies, registered it as an SEC municipal advisor, drafted a marketing brochure about the firm, and circulated the brochure to the school district and other municipalities.  The brochure created the misleading impression that Hinojosa and Barcelona Strategies had served as a municipal advisor on numerous municipal bond issuances and failed to disclose that Hinojosa had a financial interest in the school district’s offerings.  By virtue of their misrepresentations and omissions, Barcelona Strategies and Hinojosa improperly earned hundreds of thousands of dollars in municipal advisory fees.

“Municipal advisors owe a fiduciary duty to their municipal clients, who rely on advisors to make important financial decisions,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “Undisclosed conflicts of interest can lead to significant investment losses, and prevent municipal entities from making informed decisions in their selection of municipal advisors.  As described in today’s order, Barcelona [Strategies] fell well short of its obligations to this school district client.”

Without admitting or denying the allegations, Barcelona Strategies and Hinojosa consented to a cease-and-desist order and agreed to jointly and severally pay $362,606 in disgorgement and $19,514 in prejudgment interest.  Barcelona Strategies was also assessed a civil penalty of $160,000, while Hinojosa was assessed a civil penalty of $20,000.  Finally, Hinojosa was barred from association with various regulated entities, including municipal advisors.

Investment Adviser, Portfolio Manager, and Trader Charged with Mismarking Securities By Hundreds Of Millions of Dollars

On May 9, 2018, the SEC announced (here) that it charged New York-based investment adviser Premium Point Investments LP (“Premium Point”) with inflating the value of private funds it advised by hundreds of millions of dollars.  The SEC also charged Premium Point’s CEO and chief investment officer Anilesh Ahuja (“Ahuja”), as well as Amin Majidi (“Majidi”), a former partner and portfolio manager at the firm, and former trader Jeremy Shor (“Shor”).

According to the SEC’s complaint (here), the scheme ran from at least September 2015 through March 2016 and relied on a secret deal where in exchange for sending trades to a broker-dealer, Premium Point received inflated broker quotes for mortgage-backed securities (“MBS”).  In addition, the defendants allegedly used “imputed” mid-point valuations, which were applied in a manner that further inflated the value of securities. This practice allegedly boosted the value of many of Premium Point’s MBS holdings and further exaggerated returns.  The SEC alleged that the defendants overstated the funds’ value in order to conceal poor fund performance, attract and retain investors, and stave off redemptions.

“Investors rely on their investment advisers to fairly and accurately value securities, and that is especially true when the securities trade in opaque markets,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “As we allege, Premium Point masked its true performance, which denied investors the opportunity to make informed investment decisions.”

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charged the defendants with fraud, with aiding and abetting fraud, or both.  The SEC seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of this matter, also announced charges against Ahuja, Majidi, and Shor (here).  Commenting on the charges, Audrey Strauss, the Attorney for the United States on the case, said: “Investors rely on a hedge fund’s performance numbers when deciding whom to trust with their capital.  To compete with other peer funds, Neil Ahuja, founder of an investment firm, allegedly manipulated the firm’s performance numbers, using fraudulently inflated values for the firm’s securities holdings and lying to investors about how the firm would mark its positions.  By allegedly cooking the books, Ahuja and his co-defendants made the fund appear more attractive to would-be investors and dissuaded current investors from withdrawing their investments.  We will continue to work with our law enforcement and regulatory partners to ensure that investors are provided accurate information when making important investment decisions.”

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