Former Visium Portfolio Manager Stefan Lumiere Sentenced To 18 Months In Prison Following Conviction At Trial For Securities Mismarking Scheme
Joon H. Kim, the Acting United States Attorney for the Southern District of New York, announced today that STEFAN LUMIERE, a former portfolio manager at Visium Asset Management, L.P. (“Visium”), was sentenced to 18 months in prison in connection with his conviction following a jury trial for engaging in a securities mismarking scheme from 2011 to 2013. The jury convicted LUMIERE on securities and wire fraud charges relating to his mismarking of securities in a fixed-income hedge fund, which inflated the net asset value (“NAV”) of the fund and overstated the fund’s liquidity. LUMIERE was sentenced today by U.S. District Judge Jed S. Rakoff, who presided over the six-day jury trial.
Acting U.S. Attorney Joon H. Kim said: “As the evidence at trial established and as a jury unanimously found, Stefan Lumiere engaged in securities and wire fraud, routinely mismarking by millions of dollars the value of his book at Visium. For his greed-driven lies, Lumiere stands a convicted securities fraudster and has been sentenced to time in a federal prison.”
According to the allegations in the charging documents, evidence admitted at trial, court filings, and statements made in open court:
Visium managed hedge funds specializing in healthcare-related investments. One such fund operated from 2009 until September 2013 and invested primarily in debt instruments issued by healthcare companies (the “Credit Fund”).
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 (i.e., how actively traded the securities were). 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, which resulted in higher payments to Visium, among other benefits. The effect of the scheme was also to deceive investors into believing that certain securities were properly categorized as Level II securities, that is, securities that fell within an intermediate level in terms of their liquidity, when, in fact, these securities were highly illiquid Level III investments.
LUMIERE and others accomplished these goals through two principal methods. First, 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 prepared by the Credit Fund’s administrator and Visium’s back office. LUMIERE and others would then identify relatively illiquid securities 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 price quotes that they needed. The brokers would then parrot back the price quotes, 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 a 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. 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.
Second, 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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As part of the sentence imposed today by Judge Rakoff, LUMIERE, 46, of New York, New York, was further sentenced to three years of supervised release and ordered to pay a fine of $1,000,000.
Mr. Kim praised the work of the Federal Bureau of Investigation, and thanked the Securities and Exchange Commission for its assistance.
This 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.