Hedge Fund Portfolio Manager Sentenced In Manhattan Federal Court To Four Years In Prison For Fraudulent Scheme To Inflate Value Of Hedge Fund
Defendant Overstated Value Of Hedge Fund By Approximately $80 Million
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 sentenced to four years in prison today in Manhattan federal court for carrying out a fraudulent scheme to undermine the independent valuation process relating to the Hedge Fund, and to overvalue the assets of the Hedge Fund. BALBOA was previously found guilty by a jury on December 18, 2013, following a two-and-a-half-week trial, of conspiring to commit securities fraud, conspiring to commit wire fraud, and with committing securities fraud, wire fraud, and investor adviser fraud. He was sentenced today by U.S. District Judge Paul A. Crotty.
Manhattan U.S. Attorney Preet Bharara stated: “Michael Balboa has been held to account for his blatant fraud, inflating the valuation of securities in the hedge fund and falsely representing them as independent valuations. When his employer and regulators became suspicious and began to inquire, Balboa told more lies to cover his tracks.”
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, the Hedge Fund noted that “[t]here are no assets valued in house” and that the “fund has appointed an independent valuation agent” to calculate the NAV of the Hedge Fund.
The proof at trial demonstrated that, contrary to representations made to investors about the independent valuation process, BALBOA provided inflated prices for a security referred to as the Nigerian Oil Warrant. These prices were used for the Hedge Fund’s monthly valuation. BALBOA accomplished this by instructing Gilles DeCharsonville (“DeCharsonville”) and Samuel Pratt (“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.
The evidence at trial also showed that after Balboa’s employer, the Hedge Fund’s Bermudian court-appointed liquidator, and U.S. and foreign securities regulators all began to investigate the scheme, BALBOA took steps to conceal his involvement in this scheme. For example, BALBOA sent DeCharsonville false justifications to support the inflated valuations so that they would be conveyed to BALBOA’s employer, and later, to U.S. and foreign securities regulators.
In addition to the prison term, Judge Crotty sentenced BALBOA, 45, who currently resides in Melville, New York, and formerly resided in the United Kingdom, to three years of supervised release. BALBOA was also ordered to forfeit $2.23 million and to pay a $500 special assessment fee and restitution in excess of $390 million.
Mr. Bharara praised the work of USPIS, which investigated this case. He also thanked the U.S. Securities and Exchange Commission for its assistance in the investigation.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 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. Since the inception of FFETF in November 2009, the Justice Department has filed more than 12,841 financial fraud cases against nearly 18,737 defendants including nearly 3,500 mortgage fraud defendants. For more information on the task force, 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.