A London-based portfolio manager on Thursday was charged with fraud by U.S. authorities, who said he illegally reaped $6.5 million (4.1 million pound) in fees by overvaluing his former hedge fund's positions in illiquid emerging market bonds.
Michael Balboa was a managing director of Millennium Global Investments Ltd from December 2006 until the fund's collapse in October 2008, according to court documents. Millennium Global now focuses on currency management, the firm said.
Balboa, 42, was arrested and charged on Thursday with securities fraud and wire fraud, as well as conspiracy to commit securities fraud and wire fraud, according to a criminal complaint filed in U.S. District Court in Manhattan.
He will plead not guilty, said his lawyer, Joe Tacopina. We will defend the charges, Tacopina said.
A judge ordered Balboa to remain in custody until he and his lawyers worked out a bail package.
The U.S. Securities and Exchange Commission also filed civil charges against Balboa and another European broker, Gilles De Charsonville of BCP Securities LLC. The identity of his lawyer was not known and he was not criminally charged.
The case was filed in the United States because Balboa met investors and traded in securities in the fund during visits to New York in 2008, authorities said. He left the firm in early 2009 for an asset management consultancy, ARAM Global and is on leave from that firm.
A spokesman for ARAM Global said, Mr Balboa has had no management responsibilities at ARAM Global for over 18 months. We have little knowledge of the current proceedings in New York which predate his involvement with ARAM.
Neither Millennium nor any of its current employees have been accused of any wrongdoing.
Millennium Global said in a statement that it reported Balboa's rogue behaviour to market regulators in the United States and Britain. We continue to cooperate fully in bringing Mr Balboa's unauthorized behaviour to light in a former area of our business.
The SEC's case was one of a series filed this month against advisory firms and money managers it charges with improper use of fund assets, fraudulent valuations and misrepresenting fund returns.
The extraordinary returns reported by these advisers and portfolio managers were, in most cases, too good to be true, the SEC said in a statement. In other cases, outlier returns were a telltale sign that something else was amiss.
The SEC said Millennium was a credit-focused, emerging market hedge fund with reported assets of $844 million at the time of its collapse. It said Balboa received a 40 percent share of fees Millennium collected from the fund he managed, amounting to about $6.5 million.
Among the fund's holdings were illiquid Nigerian and Uruguayan bonds that traded over the counter.
By providing phony mark-to-market for their value, Balboa, Charsonville, and a third broker inflated the fund's reported monthly returns and net asset value, the court documents said. They said they hid the purported fraud from independent valuation agent GlobeOp Financial Services and outside auditor Deloitte & Touche. The third broker was not identified.
The overstatements were made to investors through monthly newsletters that outlined the fund's value per share, a U.S. Postal Inspection Service agent said in the criminal complaint.
The cases are USA v Michael Balboa, U.S. District Court for the Southern District of New York, No. 11-3038 and SEC v Michael Balboa 11-8731 in the same court.
(Reporting by Grant McCool; Editing by Phil Berlowitz and Steve Orlofsky)
(Corrects to make clear that Balboa has no management position at ARAM Global and is on leave from the firm)