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‘Greed and Lies on Wall Street’ Is Opening Argument in Bond-Marking Trial

‘Greed and Lies on Wall Street’ Is Opening Argument in Bond-Marking Trial

(Bloomberg) -- Premium Point Investments co-founder Anilesh “Neil” Ahuja and a trader led a two-year scheme overvaluing the firm’s mortgage bonds by more than $200 million to attract new investors and keep current ones, prosecutors said at the start of their fraud trial.

Ahuja, a former head of Deutsche Bank’s global residential mortgage-bond trading, and trader Jeremy Shor are accused of mismarking securities in the firm’s funds to inflate their value, allowing them to charge higher management and performance fees and ward off withdrawals.

‘Greed and Lies on Wall Street’ Is Opening Argument in Bond-Marking Trial

“This is a case about greed and lies on Wall Street,” Assistant U.S. Attorney Joshua Naftalis said during opening statements Wednesday in Manhattan federal court. "Why’d they do it? To line their own pockets.”

Ahuja and portfolio manager Amin Majidi set an inflated target for returns at the end of each month, based partly on the performance of peer funds, and directed traders including Shor to “reverse engineer” the valuations to meet those targets, prosecutors claim. The firm used corrupt brokers who gave its traders inflated price quotes in exchange for its business and relied on them to provide price spreads that could be used to overvalue the securities, prosecutors say.

Majidi pleaded guilty in October and is expected to testify for prosecutors, as is one of the brokers, former Nomura trader Frank DiNucci Jr., who allegedly provided Shor with bogus valuations. Another government witness, the firm’s former chief risk officer, Ashish Dole, also admitted he received bogus quotes and spreads from brokers.

Ahuja, 51, and Shor, 44, are charged with fraud and conspiracy.

Hard to Price

Lawyers for the two men argued that the valuations were within appropriate ranges for illiquid securities that are hard to price, and that investors and third parties were aware of their methods.

Roberto Finzi, a lawyer for Ahuja, said his client tried his "level best" to be honest with employees and investors. While Ahuja sometimes made mistakes, he never directed anyone to act illegally, Finzi said. Instead, he said, it was Majidi and Dole, who were afraid of losing their lucrative jobs as the firm moved away from mortgage bonds, who "cooked the books."

"Those same men, the men Mr. Ahuja had promoted –- when the music stopped, they turned around and they pointed at the last man standing," Finzi said. "They used the oldest trick in the book: ‘My boss made me do it.’”

Daniel Ruzumna, Shor’s lawyer, said his client didn’t intend to defraud investors. Shor didn’t send statements to investors, wasn’t a part of the valuation committee and never had authority to determine how the firm valued its securities, Ruzumna said.

Shor reported to Majidi, who tolerated little dissent from his traders, and pushed Shor and others to obtain high marks for their securities, Ruzumna said. When Majidi ignored his complaints about the way the bonds were valued, Shor raised his concerns about the valuations to compliance officers in late 2015 and resigned months later, Ruzumna said.

"Jeremy walked away from it all because the concerns he raised had not been addressed," Ruzumna said.

The activities at Premium Point came to light near the end of a broader crackdown by prosecutors on dubious practices used by bond traders. DiNucci testified for the government against three former Nomura traders accused of lying to customers about prices, and now is helping on a separate investigation into mismarking.

Opportunity in Crisis

Ahuja founded Premium Point with Patrick Downes and Hyung Peak in 2008 after leaving Deutsche Bank. The firm focused on the U.S. residential real estate market. It sought to acquire undervalued assets by using granular research -- attending foreclosure auctions throughout the U.S., using broker networks -- to monitor borrower behavior, and began amassing mostly subprime residential mortgage bonds after they triggered the global credit crisis and their prices plunged.

As values recovered, Premium Point expanded into the jumbo-loan and the home-rental businesses. At its peak, it managed $5 billion in assets, according to prosecutors.

Then, in 2016, the firm told investors it had found signs of improper valuations and would have to restate returns from 2015 and 2016.

The spreads in question were the difference between the asked price and bid price on the bonds. Shor got DiNucci to give him spreads for entire sectors of securities, prosecutors say. While the firm’s policy required pricing the bonds at the midpoint between the bid and the ask, Premium Point used the sector spreads to create a higher midpoint that would allow them to overvalue the bonds, they claim.

Prosecutors Investigate

"Every month, Shor would dictate the prices that he wanted to DiNucci for these bonds,” Naftalis told jurors. “He would literally read him a list of the bonds and the prices he would want, and DiNucci, the broker, would often just parrot the prices right back."

By September 2016, Premium Point was winding down its hedge fund business and under investigation by the U.S. Securities and Exchange Commission. In January 2017, Chief Financial Officer Michael Mercer, who wasn’t charged, stepped down. By May, federal prosecutors were investigating hedge funds, including Premium Point, suspected of inflating the value of debt securities in their portfolios.

The firm’s mortgage credit funds filed for bankruptcy protection from creditors last year. Ahuja, Majidi and Shor were charged two months later.

Mismarking fraud was at the center of a case against fund managers at Visium Asset Management LP. Former Visium analyst Stefan Lumiere was sentenced to 18 months in prison in 2017 for helping inflate the value of the firm’s bond holdings by millions of dollars to hide losses.

The case is U.S. v Ahuja, 18-cr-328, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in Federal Court in Manhattan at cdolmetsch@bloomberg.net

To contact the editor responsible for this story: David Glovin at dglovin@bloomberg.net

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