Visium Asset Management LP, a registered investment adviser, agreed to pay a fine of approximately US $4.75 million to the Securities and Exchange Commission in connection with a scheme to falsely inflate the value of securities in one fund it managed – Visium Credit Master Fund, Ltd – and for benefiting from the insider trading of securities by its employees for another fund it managed – Visium Balanced Master Fund, Ltd., as well as by the Credit Fund. Visium also agreed to disgorge US $4.75 million of profits as well as to pay prejudgment interest of US $721,000 as part of its settlement.

According to the SEC, from at least January 2011 to December 2012, two Visium portfolio managers – Christopher Plaford and Stefan Lumiere – routinely used “sham” broker quotes to mismark the value of securities held by the Credit Fund, showing higher than warranted month-end net asset values. This caused the Credit Fund to pay Visium US $2.6 million in “ill-gotten” performance fees and US $533,700 in illicit management fees. To effectuate this mismarking, Mr. Plaford and Mr. Lumiere overrode prices of securities of the Credit Fund’s independent administrator with sham prices, often violating Visium’s valuation policies which recommended that Visium obtain three dealers’ quotes to support a price override; in 307 out of 308 instances of overrides, only one or two quotes were utilized.

In addition, the SEC claimed that two Visium portfolio managers – Sanjay Valvani and Mr. Plaford – traded on insider information for the Visium funds. The SEC charged that Mr. Valvani traded on securities of pharmaceutical companies for the Balanced Fund based on material, nonpublic information illicitly obtained from a former official of the US Food and Drug Administration’s Office of Generic Drugs, while Mr. Plaford traded on securities of home health-care providers for both the Credit and Balanced Funds based on material, nonpublic information illicitly obtained from a former official from the Centers for Medicare and Medicaid Services. Mr. Valvani’s activities generated US $6.98 million in illicit trading profits for the Balanced Fund, claimed the SEC, while Mr. Plaford’s activities resulted in US $284,939 in illegal profits for the Credit and Balanced Funds, charged the SEC.

Separately, Steven Ku, Visium’s former chief financial officer, agreed to pay a fine of US $100,000 and be suspended from any SEC registrant for 12 months for failing to act on red flags that should have alerted him to the scheme to falsely inflate the value of securities by the two Visium portfolio managers for the Credit Fund. The SEC said that Mr. Ku received monthly reports that showed that Mr. Plaford and Mr. Lumiere used overrides on approximately 25 percent of the positions in the Credit Fund and that more than 91 percent of the changes resulted in higher valuations.

The Department of Justice and SEC filed criminal and civil charges against Mr. Lumiere and Mr. Plaford, respectively, for their alleged mismarking activities in June 2016. Mr. Valvani and Mr. Plaford were also charged criminally for insider trading. Mr. Plaford pleaded guilty to his criminal charges, while Mr. Lumiere was sentenced to 18 months’ imprisonment in June 2017. (Click here for background in the article “DOJ and SEC Charge Former FDA Official With Obtaining Confidential Information to Fuel Insider Trading by Hedge Fund Managers” in the June 19, 2016 edition of Bridging the Week. Click here to access a United States Department of Justice press release regarding Mr. Lumiere’s sentencing.) Mr. Valvani committed suicide in 2016. (Click here for a newspaper article related to this incident.)

Last week, another SEC-registered investment adviser – Premium Point Investments LP – and three of its officers, including its chief executive officer, were also charged by the SEC for overvaluing securities in investment funds they managed (click here to access a copy of SEC’s complaint). The three individuals were additionally named in a criminal complaint filed by the U.S. Attorney’s office in New York City (click here to access a copy of the complaint).

Compliance Weeds: Investment advisers must ensure they have and enforce policies and procedures reasonably designed to prevent the use of material, nonpublic information.

In August 2017, Deerfield Management Company, L.P., agreed to pay a fine of approximately US $3.95 million to the SEC to resolve charges that, from 2012 through 2014, it failed to have and enforce such policies and procedures. According to the SEC, during this time, the firm, an SEC-registered investment adviser, did not have policies and procedures that addressed the risk that its employees could use material, nonpublic information illicitly obtained from its research firms, particularly those specializing in political intelligence.

Moreover, the SEC claimed that, during the relevant time, Deerfield did not act on red flags that it was potentially receiving information regarding confidential government decisions before public announcement.

(Click here for further background in the article “Investment Adviser Agrees to Pay Almost US $5 Million to Resolve SEC Charges of Not Having Adequate Insider Trading Prevention Policies and Procedures” in the August 27, 2017 edition of Bridging the Week.)