Fraudulent Over Valuation Investment Fraud Litigation and FINRA Arbitration Lawyer, Russell L. Forkey, Esq.
Securities and Exchange Commission v. Michael R. Balboa and Gilles T. De Charsonville, Civil Action No. 8731 (S.D.N.Y. filed December 1, 2011)
SEC CHARGES HEDGE FUND MANAGER AND BROKER WITH MULTI-MILLION DOLLAR OVERVALUATION SCHEME
The Securities and Exchange Commission recently announced that it filed a civil injunctive action in the United States District Court for the Southern District of New York charging two individuals with engaging in a fraudulent scheme to overvalue illiquid asset holdings of the now insolvent hedge fund, Millennium Global Emerging Credit Fund (the “Fund”), and thereby inflate the Fund’s reported returns and net asset value. The defendants named in the Commission’s complaint are Michael Balboa, the Fund’s former portfolio manager, and Gilles De Charsonville, a broker with BCP Securities, LLC.
The SEC’s complaint alleges that from January through October 2008, Balboa surreptitiously provided De Charsonville and another broker with fictional prices for them to pass on to the Fund’s outside valuation agent and its auditor. Specifically, Balboa had De Charsonville and the other broker portray the valuations for two of the Fund’s illiquid securities holdings, Nigerian and Uruguayan warrants, as ostensibly independent month-end “marks” that were provided by third-party sources. In fact, Balboa completely fabricated the prices which De Charsonville and the other broker were complicit in passing onto the valuation agent and auditor for these two securities. This scheme caused the Fund to drastically overvalue these two securities holdings by as much as $163 million in August 2008, which, in turn, allowed the Fund to report inflated and false-positive monthly returns. By overstating the Fund’s returns and overall net asset value, Balboa was able to attract at least $410 million in new investments, deter about $230 million in eligible redemptions and generate millions of dollars in inflated management and performance fees.
The SEC’s complaint charges the defendants with committing and/or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 206 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder and, as to Balboa, Section 17(a) of the Securities Act of 1933. De Charsonville is also charged with violating Financial Industry Regulatory Authority Rule 5210. As to both defendants, the SEC’s complaint seeks a permanent injunction against future violations, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.
The United States Attorney’s Office for the Southern District of New York (“USAO”), which conducted a parallel investigation of this matter, has also announced the arrest of Balboa and the simultaneous filing of a criminal complaint against him.