Former Visium Asset Management LP trader, Jason Thorell’s cooperation with the SEC Whistleblower Program and other US federal agencies has supported insider trading and fraud and conspiracy proceedings brought by the SEC against former Visium hedge fund managers and a government employee at the FDA. The US Attorney’s Office for the Southern District of New York has brought parallel criminal proceedings against the individuals. Thorrell had previously raised his concerns about misconduct at Visium with Jake Gottlieb, Visium’s founder and Chief Investment Officer. However, his concerns were ignored, which ultimately led him to partake in investigations and proceedings against key Visium personnel.

Visium Asset Management

Visium Asset Management LP was a health care focused hedge fund that managed approximately $8 billion in funds at its peak. Visium was founded in 2005 and had approximately 170 employees based in New York, London and San Francisco. In June 2016, Visium decided to liquidate the fund’s entire holdings as a result of investigations for alleged insider trading and fraudulent inflation of fund holdings as well as poor fund performance. Prior to the decision, on June 15, 2016, the SEC announced insider trading charges against two Visium hedge fund managers, Sanjay Valvani and Christopher Plaford, and their FDA source, Gordon Johnston. A third Visium manager, Stefan Lumiere, was charged, along with Plaford, with falsely inflating assets in portfolios he managed. In parallel actions, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against all four individuals.

Charges against Lumiere, Plaford, Valvani and Johnson

(i) Stefan Lumiere and Christopher Plaford

The SEC alleged that Lumiere and Plaford engaged in a scheme to falsely inflate the value of securities held by a hedge fund advised by Visium. The alleged manipulations were suspected to have occurred from at least July 2011 to January 2013. The SEC alleged that Lumiere used sham broker quotes to mismark as many as 28 securities per month by passing on his desired prices to brokers using his cell phone or a flash drive. The fund allegedly reported artificially inflated returns and paid out more than $5.9 million in inflated management and performance fees. Specifically, the SEC’s complaint against Lumiere charges him with committing or aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 as well as Section 206 of the Advisers Act and Rule 206(4)-8. Lumiere’s trial is before U.S. District Judge Rakoff.

Similarly, the SEC’s complaint against Plaford charged him with violations of Section 10(b) of the Exchange Act and Rule 10b-5 and Section 206 of the Advisers Act and Rule 206(4)-8 as well as with aiding and abetting his firm’s violation of Section 204A of the Advisers Act. Plaford pleaded guilty to mismarking and insider trading in relation to his conduct with Valvani and Johnson described below, for which, Johnson has cooperated with the SEC’s investigation.

(ii) Sanjay Valvani and Gordon Johnston

Valvani was charged with participating in a scheme to commit securities fraud and wire fraud relating to his agreement with Johnston, a former senior official at the FDA, to unlawfully obtain confidential and material non-public information from the FDA. Johnston allegedly provided Valvani with the details of his conversations with FDA personnel and Valvani then traded in advance of public announcements concerning the FDA approvals for companies such as Momenta Pharmaceuticals, Watson Pharmaceuticals, and Amphastar Pharmaceuticals. The SEC alleged Valvani received unlawful profits of nearly $32 million for hedge funds based on the tips from Johnson. The SEC further alleged Valvani tipped Plaford who made $300,000 based on insider information.

The SEC’s complaint against Valvani and Johnston charged them with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Valvani was also alleged to have aided and abetted his firm’s violation of Section 204A of the Investment Advisers Act of 1940. Valvani was found dead in his apartment in an apparent suicide approximately one week after the indictment.

The SEC entered into a settlement agreement with Gordon Johnston who agreed to pay disgorgement in the total amount of $127,496.03.

Jason Thorell: the Whistleblower

Thorell spent more than two years cooperating with the FBI and the SEC recording more than 125 conversations with colleagues totalling almost 200 hours. Thorell also cooperated as a witness against Lumiere in the criminal fraud and conspiracy trial before Judge Rakoff.

Thorell contacted a lawyer after he received a thumb drive from Lumiere with the figures Lumiere wanted the broker to dictate back to Visium to price the firm’s holdings. Shortly after, on June 24, 2013, Thorell emailed Gottlieb, stating “I would like to discuss a serious concern I have about the monthly pricing process at your convenience.” Gottlieb told Thorell he would have Visium’s compliance officer contact Thorell. Thorell told the jury in Lumiere’s trial that nothing had been done by the end of the month and that "overall, [Visium] neglected to address [his concerns] and were generally dismissive of [his] concerns." After his concerns were ignored Thorell reported his concerns to the SEC and began working with the FBI.

Thorell’s information triggered an investigation into how Visium valued the holdings in its credit portfolio which expanded into the charges brought against the hedge fund managers who were allegedly trading on insider tips about FDA regulatory decisions. Thorell’s participation in any illegal activity is not entirely clear. In any event, he has received immunity for his cooperation. Thorell may also be in line for a substantial payout under the SEC whistle blower program, where he may earn 10-30% of any money the agency collects above $1 million using his information.

Visium’s failure to employ appropriate internal compliance protocols is a warning to Ontario market participants in the new age of whistleblowers

The fact that Thorell attempted to bring forward his concerns internally before turning SEC whistleblower is a fact that must not be lost on Ontario market participants. The importance of well-designed and well-executed internal compliance programs as a means of proactively addressing potential securities misconduct cannot be stressed enough. The OSC launched its Whistleblower Program in July 2016. The OSC, does not require whistleblowers to report potential securities violations internally as a condition to receiving payment for information under its program. However, the OSC does encourage employees to report potential securities violations through established workplace protocols. Market participants are encouraged to foster an environment of compliance and ensure internal protocols are in place and well known by employees.