Hedge Fund Portfolio Manager Convicted In Manhattan Federal Court Of Scheme To Inflate Value Of Hedge Fund
Defendant Overstated Value of Hedge Fund by Approximately $80 Million And Then Made Efforts to Cover Up Scheme
Preet Bharara, the United States Attorney for the Southern District of New York, announced that MICHAEL BALBOA, formerly a portfolio manager for Millennium Global Emerging Credit Fund (“MGEC” or the “Hedge Fund”), was found guilty today in Manhattan federal court of securities fraud, wire fraud, and investment adviser fraud charges, as well as conspiracy to commit securities fraud and wire fraud, in connection with BALBOA’s scheme to undermine the independent valuation process relating to the Hedge Fund, and to overvalue the assets of the Hedge Fund. BALBOA’s overvaluation of one particular security held in his portfolio, a sovereign contingent debt instrument issued by the Government of Nigeria (the “Nigerian Oil Warrant”), caused the Hedge Fund’s reported net asset value to be overstated by approximately $80 million dollars. BALBOA was convicted after a two-and-a-half-week trial presided over by U.S. District Judge Paul A. Crotty.
Manhattan U.S. Attorney Preet Bharara said: “Today’s verdict ensures that Michael Balboa will be punished for deceiving investors by manipulating the valuations at his former hedge fund to falsely inflate the fund’s performance, and enlisting others to help him. As Balboa now knows, those who mislead investors for their own personal gain, and then try to cover their tracks, will be pursued and prosecuted by this Office.”
According to the Superseding Indictment filed in Manhattan federal court, other court documents, and the evidence presented at trial:
From December 2006 to October 2008, BALBOA served as the portfolio manager for the Hedge Fund. The Hedge Fund’s strategy was to invest in a portfolio of corporate and sovereign debt instruments in emerging countries. The Hedge Fund utilized an independent valuation agent (the “IVA”) to determine the Hedge Fund’s “net asset value” (“NAV”), which is the value of the Hedge Fund’s assets, less liabilities and estimated costs of sale/liquidation. The Hedge Fund’s manager, the entity that employed Balboa, represented to investors that sources independent from Balboa would provide prices to the IVA for each security held in the Hedge Fund for purposes of determining the NAV on a monthly basis. For example, in one due diligence questionnaire sent on March 7, 2008, to a potential investor for the purpose of providing certain information about the Hedge Fund’s valuation process, the Hedge Fund’s manager noted that “[t]here are no assets valued in house” and that the IVA “calculates the NAV of [the Hedge Fund] independently of Millennium Global.”
Contrary to representations he made to investors about the independent valuation process, BALBOA himself provided inflated prices for the Nigerian Oil Warrant that were used for the Hedge Fund’s monthly valuation. BALBOA accomplished this by instructing Gilles DeCharsonville and Samuel Pratt, two co-conspirators with whom BALBOA worked, to provide the IVA with those values while falsely representing that the values were generated independently by DeCharsonville and Pratt. For example, in 2008, although the Nigerian Oil Warrant traded at a price no higher than $239, BALBOA directed DeCharsonville and Pratt to provide the IVA with marks ranging from approximately $525 to $3,500. The IVA then used these falsely inflated marks to compute the Hedge Fund’s monthly NAV, which, in turn, as of August 2008, caused the NAV to be overstated by approximately $80 million. These false values were then sent to investors by means of monthly newsletters, among other types of communications.
After Balboa’s employer, along with U.S. and foreign securities regulators, began to investigate the scheme, BALBOA took steps to cover his tracks. For example, BALBOA sent DeCharsonville false justifications for the inflated valuations for the purpose of further conveying to BALBOA’s employer, as well as the U.S. and foreign securities regulators.
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BALBOA, 44, who currently resides in Melville, New York, and formerly resided in the United Kingdom, was convicted of all five counts in the Superseding Indictment, namely (1) securities fraud conspiracy; (2) wire fraud conspiracy; (3) securities fraud; (4) wire fraud; and (5) investment adviser fraud. He faces a maximum of five years in prison on each of the conspiracy counts, and 20 years in prison on each of the substantive fraud counts. The date for sentencing has not yet been scheduled.
Mr. Bharara praised the work of the United States Postal Inspection Service, which investigated this case. He also thanked the U.S. Securities and Exchange Commission.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jason H. Cowley and David I. Miller, and Special Assistant United States Attorney William T. Conway, are in charge of the prosecution.