The U.S. Attorney’s Office for the Southern District of New York announced that hedge fund portfolio manager Michael Balboa was arrested on December 1, 2011 on charges related to his alleged scheme to overvalue by more than $80 million the assets of Millennnium Global Emerging Credit Fund (the “Hedge Fund”), the hedge fund at which he was employed. Balboa, a resident of the United Kingdom, was arrested in New York City and was presented before U.S. Magistrate Judge Gabriel Gorenstein the same day. Mr. Balboa was also subject to an SEC complaint alleging many of the same facts. The case was referred to Justice for criminal prosecution.

As alleged, Balboa, along with co-conspirators, manipulated the valuation process at his former hedge fund to make it appear financially stronger than it really was and for his own personal gain. U.S. Attorney Preet Bhara stated that those actions of Balboa harmed the fund and deceived its investors.

The Indictment alleges that Balboa served as the portfolio manager for the Hedge Fund from December 2006 to October 2008, when it ceased operation. The Hedge Fund’s strategy was to invest in a portfolio of corporate and soveriegn debt instruments in emerging countries. The Hedge Fund utilized an independent valuation agent (the “IVA”) to determine its “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 referenced the role of the IVA in a variety of documents that were sent to its investors and prospective investors, including an offering memorandum, monthly newsletters, and responses to due diligence questionnaires (“DDQs”). In one DDQ, the Hedge Fund noted that “[t]here are no assets valued in house,” and that the IVA “calculates the NAV of [the Hedge Fund] independently of Millennium Global.” The Hedge Fund relied on the IVA’s determinations in advising its investors of the Hedge Fund’s month-end NAV and NAV per share.

From January 2008 through October 2008, Blaboa allegedly instructed two co-conspirators (“CC-1” and “CC-2”) to provide the IVA with substantially inflated prices for one of the Hedge Fund’s securities – payment-adjusted warrants from the Government of Nigeria (the “Nigerian Warrants”). CC-1 and/or CC-2 provided these overvalued prices to the IVA. Although the Nigerian Warrants traded between $145 and $258 from January 2007 to October 2008, CC-1 and/or CC-2 provided the IVA with price valuations or “marks” ranging from $531.25 to $3,500.00, at various times throughout this period. The IVA then used these falsely inflated marks in computing the monthly NAV for the Hedge Fund. This caused the IVA to overstate the NAV by tens of millions of dollars. These overstatements were communicated to investors through, among other things, monthly newsletters that outlined the NAV and NAV per share of the Hedge Fund.

Balboa is charged with one count of conspiracy to commit securities fraud and wire fraud, one count of securities fraud and one count of wire fraud. The conspiracy count carries a maximum sentence of five years in prison, and the substantive counts each carry a maximum sentence of 20 years in prison.

The investigation leading up to the charges Balboa now faces were brought in coordination with President Obama’s Financial Fraud Enforcement Task Force, an interagency task force designed to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. Individuals involved in the financial industry should strive to follow protocol at all stages of their dealings to avoid being caught up in an investigation by this formidable body.

The author of this blog is Erich Ferrari, an attorney specializing in Federal Criminal Defense matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrari-legal.com.

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