Former Portfolio Manager Stefan Lumiere Convicted on All Counts In Manhattan Federal Court
Preet Bharara, the United States Attorney for the Southern District of New York, announced today that STEFAN LUMIERE, a former portfolio manager at Visium Asset Management, was convicted of conspiracy to commit securities and wire fraud, securities fraud, and wire fraud in connection with a scheme to mismark securities held in a particular fund from 2011 to 2013 in order to overstate the net asset value (“NAV”) of the fund that was reported to investors on a monthly basis. LUMIERE was convicted following a six-day jury trial presided over by U.S. District Judge Jed S. Rakoff.
U.S. Attorney Preet Bharara said: “In a swift verdict, a federal jury convicted Stefan Lumiere, a former portfolio manager at Visium, of securities and wire fraud. For years, Lumiere mismarked securities in his portfolio, using sham broker quotes and fake purchase prices to vastly overstate the value of his fund. The securities Lumiere traded may have been complex, but his criminal scheme was simple: lie and make up numbers to make more money. As the verdict reflects, the jury quickly saw Lumiere’s conduct for what it was, criminal fraud.”
According to the allegations in the charging documents and statements made in court proceedings:
Visium Asset Management
At all relevant times, Visium Asset Management (“Visium”) managed hedge funds specializing in healthcare-related investments. Visium managed a credit fund (the “Credit Fund”), which operated from in or about 2009 until in or about September 2013, and invested primarily in debt instruments issued by healthcare companies.
The Scheme to Mismark Securities
From June 2011 through September 2013, LUMIERE and others participated in a scheme to defraud the Credit Fund’s investors and potential investors by deceptively mismarking each month the value of certain securities held by the Credit Fund. The objective of the scheme was two-fold: (1) to inflate the Credit Fund’s NAV; and (2) to mislead investors about the liquidity of the Credit Fund’s holdings. Visium assessed performance fees to be paid by investors each year based on the Credit Fund’s profits and losses. LUMIERE’s mismarking was in violation of Visium’s internal valuation procedures and contrary to Visium’s representations to investors. The effect of the scheme was to overstate the Credit Fund’s NAV, often by tens of millions of dollars as calculated at the end of each month to investors.
In order to carry out the scheme, LUMIERE and others solicited, obtained, and relied on false and fraudulent price quotes from employees of broker-dealers in order to improperly override prices calculated by the Credit Fund’s administrator and artificially inflate the Credit Fund’s NAV each month. For each month-end valuation, LUMIERE and others would begin by reviewing an inventory of the Credit Fund’s investments and proposed valuations for each prepared by the Credit Fund’s administrator and Visium’s back office. LUMIERE and others would then identify those relatively illiquid securities as to which they disagreed with or disliked the proposed price, and create a list reflecting the prices at which they wanted each security to be marked for month-end valuation purposes. That price was often significantly higher or lower than the price available from public price data. LUMIERE and others would then contact one or two “friendly” brokers and dictate to the friendly brokers the price quotes that they needed. The brokers would then parrot back the price quotes from their Bloomberg email account, giving the price quotes the appearance that they had come from an independent broker, and thus were in compliance with the Credit Fund’s pricing methodology. The friendly brokers’ sham quotes were then submitted to Visium’s accounting department as purportedly independent bases for that security’s valuation, for the eventual submission to the Credit Fund’s administrator.
By obtaining these sham quotes, LUMIERE and others caused a number of the Credit Fund’s securities to be misclassified in order to mislead investors about the liquidity of the securities (i.e., how actively traded the securities were). Specifically, for a number of illiquid bonds, LUMIERE and others fraudulently caused Visium to assign a classification that led investors to believe that the bonds were relatively liquid, when in fact they were entirely illiquid. This was done contrary to disclosures to investors about the Credit Fund’s percentage of illiquid investments, in order to induce investors to invest in or keep their money in the Credit Fund.
As another method to carry out the scheme, LUMIERE purchased additional quantities of certain securities – in which the Credit Fund had an established position – at a deceptively inflated price, markedly higher than the prevailing market was offering that security, in a practice known as “painting the tape.” The inflated price was then reported to Visium’s accounting department for NAV purposes. In both cases – the sham broker quotes and the inflated purchase prices – it was LUMIERE’s intent to increase the price of certain securities in order to inflate the Credit Fund’s month-end valuation.
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LUMIERE, 46, of New York, New York, was convicted of one count of conspiracy to commit securities fraud and wire fraud, which carries a maximum sentence of five years in prison; one count of securities fraud, which carries a maximum sentence of 20 years in prison; and one count of wire fraud, which also carries a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.
Mr. Bharara praised the work of the FBI, and thanked the SEC for its assistance.
This case was brought in connection with the President’s Financial Fraud Enforcement Task Force. 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 is 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. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
The case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Ian McGinley, Damian Williams, and Joshua A. Naftalis are in charge of the prosecution.