The co-founder of Premium Point Investments, a portfolio manager at the hedge fund and a trader were charged with inflating the value of securities in their portfolio to make the holdings appear more attractive to potential investors and discourage clients from withdrawing funds, federal prosecutors said.
The hedge fund wasn't named by prosecutors in an indictment. But the co-founder, Neil Ahuja; the portfolio manager, Amin Majidi; and the trader, Jeremy Shor, all worked at Premium Point, which wound down last year amid an investigation by the U.S. Securities and Exchange Commission into valuations the hedge fund manager gave to some of its assets. The SEC also sued Premium Point on Wednesday.
"By allegedly cooking the books, Ahuja and his co-defendants made the fund appear more attractive to would-be investors and dissuaded current investors from withdrawing their investments," Audrey Strauss, senior counsel to Manhattan U.S. Attorney Geoffrey Berman, said in a statement.
The charges indicate a federal probe into mismarking is moving ahead. The investigation signaled a new direction in enforcement for the Justice Department after years of high-profile insider-trading cases and prosecutions of bond traders for lying to their counterparts about the prices of mortgage-backed securities. Mismarking was at the center of a case against fund managers at Visium Asset Management last year that ended in a guilty verdict against one of its portfolio managers.
Wednesday's announcement comes almost a year after the probe into mismarking came to light during a trial of three former Nomura Holdings traders who were charged with lying to their customers about bond prices. A former Nomura trader who pleaded guilty and testified for prosecutors in that case, Frank DiNucci Jr., said he provided bogus quotes to Mr. Shor and was cooperating with a government probe of Premium Point.
A former chief risk officer at Premium Point, Ashish Dole, pleaded guilty to conspiracy and fraud charges in November and also is cooperating with the government, prosecutors said on Wednesday.
The three men are accused of inflating the values of securities in hedge funds they managed by more than $200 million. Messrs. Ahuja and Majidi were arrested Wednesday morning and Mr. Shor surrendered to authorities. They are scheduled to appear in Manhattan federal court later Wednesday.
Mr. Ahuja founded Premium Point around 2008 after heading the residential mortgage-backed securities group at Deutsche Bank. The firm, which managed more than $5 billion in assets at its peak, focused primarily on structured credit products, including mortgage-backed securities.
According to prosecutors, Premium Point used two methods to mismark assets. The first involved securing fraudulently inflated quotes from corrupt brokers such as Mr. DiNucci and using those to set values for their bonds. The second involved misusing spreads, or the difference between the prices at which a bond is offered for sale and how much buyers bid to purchase it, from brokers to inflate the funds' net asset values.
The scheme ran from 2014 to 2016 and allowed the firm to charge higher fees for management and performance, prosecutors said. Messrs. Ahuja, Majidi and Shor are each charged with two counts of conspiracy, one count of securities fraud and one count of wire fraud. They face as long as 20 years in prison if convicted of the most serious charges.
Prosecutors said Mr. Dinnuci initially balked at providing inflated marks, but eventually agreed to parrot them in the expectation that the firm would use him as a broker. In one exchange with Mr. Shor in September 2015, Mr. DiNucci wrote "(T)ell Ashish dog to chuck me a damn trade if I keep marking up all his bonds ha," according to the indictment.
