Hedge fund founder charged with mismarking securities

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http://www.crainsnewyork.com/article/20180509/FINANCE/180509865/anilesh-ahuja-founder-of-hedge-fund-premium-point-investments

May 9, 2018 1:07 p.m. Updated 05/09/2018

Hedge fund founder charged with mismarking securities

Premium Point Investments founder and CEO, plus a former portfolio manager and a former trader arrested

By Associated Press

A New York hedge fund founder was arrested Wednesday on charges that he exaggerated his company's performance by more than $200 million to impress and preserve investors. Anilesh Ahuja, 49, of Manhattan, was charged with conspiracy, securities fraud and wire fraud.

Federal officials said that the founder, chief executive and chief investment officer of the investment firm Premium Point Investments LP had carried out a fraud from 2014 through 2016 that was designed to make investors believe that the firm's hedge funds were doing much better than they were. Between 2008 and 2016 the firm managed billions of dollars in assets, exceeding $5 billion at one time at its peak, authorities said.
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According to an indictment, Ahuja started his firm in 2008 and launched the company's flagship mortgage credit fund a year later. After the firm began overstating the net asset value of its funds by more than $200 million at times, it was able to charge investors higher management and performance fees and could forestall redemptions, authorities said.

Prosecutors also announced Wednesday that the firm's former chief risk officer and a former salesman at a broker-dealer have pleaded guilty to charges and are cooperating.

The Securities and Exchange Commission also filed civil charges against Ahuja, Majidi and Shor.
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[nitpicker]

1. From the DoJ PR

https://www.justice.gov/usao-sdny/pr/hedge-fund-founder-portfolio-manager-and-trader-charged-manhattan-federal-court

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As alleged in the Indictment, from at least in or about 2014 through at least in or about 2016, AHUJA, MAJIDI, SHOR, and others, including DOLE and DINUCCI, participated in a scheme to defraud the Firm’s investors and potential investors in the Hedge Fund and the New Issue Fund by deceptively mismarking each month the value of certain securities held in those funds, and thus fraudulently inflating the NAV of those funds as reported to investors and potential investors. At times, the NAV was overstated by more than $200 million across the funds managed by the Firm.

This benefited the Firm in at least two ways. First, the Firm was able to charge its investors higher management and performance fees. Second, the Firm was able to forestall redemptions by investors who would have requested a return of their funds had they known the Firm’s true performance and operating health.

The mismarking scheme evolved as a result of demands by AHUJA and MAJIDI that the Firm maintain its track record of success and keep pace with the performance of peer funds, regardless of market conditions or the actual performance of the funds. To achieve the goal of posting competitive returns, AHUJA and MAJIDI set an inflated “target” return for the Hedge Fund at the end of each month, which was based in part on the performance of peer funds. As part of the scheme, MAJIDI, frequently in the presence of AHUJA, directed the members of the trading desk, including SHOR, DOLE, and others, that the Firm must meet its “target” performance number for the month. The traders at the Firm were then tasked with “reverse engineering” marks to meet the “targets.”

The Firm mismarked securities using two illicit methods. In the first method, the Firm secured fraudulently inflated price quotes for particular securities from corrupt brokers. AHUJA, MAJIDI, SHOR, and others then relied on these inflated quotes to set correspondingly inflated marks for their bonds. Specifically, AHUJA and MAJIDI were aware that SHOR had access to corrupt brokers – including DINUCCI – and directed SHOR, along with DOLE and others, to use these corrupt brokers to secure the inflated quotations they needed to hit their internal “targets.” While DINUCCI initially resisted some of the inflated marks that SHOR requested that he provide, DINUCCI eventually agreed to parrot back the exact marks SHOR had requested. In exchange for sending these inflated marks, DINUCCI expected that SHOR and the Firm would use DINUCCI and his firm as a broker.

In the second method, AHUJA, MAJIDI, SHOR, and others relied on corrupt brokers to secure “spreads” that could be used to inflate the NAV of the funds to meet the internal “targets.” Specifically, SHOR, DOLE, and others – with the knowledge and approval of AHUJA and MAJIDI – secured and misused “spreads” from corrupt brokers, including DINUCCI. A spread is typically the difference between a bid and an ask for a given security. But SHOR obtained so-called “sector spreads” from DINUCCI for use in mismarking the Firm’s positions. Sector spreads are the difference between the bid and the ask for entire sectors of securities (e.g., non-agency RMBS), not the bid and ask for specific securities. Because a sector spread reflected the difference between the cheapest and most expensive securities within an entire sector, it would be at least as large as (and almost certainly significantly larger than) the spread for a given bond in that sector. Generally, the Firm’s valuation policy required the Firm to mark a position at the “mid,” i.e., between the bid and the ask. The Firm used sector spreads to fraudulently create what it called an “implied mid,” or “imputed mid,” for particular securities. Where a broker supplied the Firm with a bid, the Firm added half of the sector spread to “calculate” the implied mid of a bond. SHOR, DOLE, and MAJIDI internally referred to this use of implied or imputed mids as “the lever” – because it could be used to manipulate the NAV to meet AHUJA’s fraudulent targets.
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