Visium Asset Management is essentially closed down in the wake of an insider trading scandal that rocked the hedge fund industry. The federal government brought charges against three traders, avoiding direct charges against the company and Jacob Gottlieb, its founder, but prompting an investigation that unraveled the firm. In the wake of the scandal, more information has emerged that reveals a fund organized sloppily, with numerous questionable practices, conflicts of interest, and other problematic features. The whistleblower in the case, a former trader named Jason Thorell, worked with investigators to record hundreds of hours of conversation that implicated a number of employees in illegal activities.
From Humble Beginnings
Gottlieb's plans involved developing the fund into a major player in the industry, and for several years it seemed that the company may have been able to succeed in that venture. Visium began as a fund focused on health-care and quickly expanded its areas of interest, growing at the same time from $4 billion in assets under management in 2013 to about $8 billion by 2016. The firm began in 2005 as a venture by Gottlieb and some of his family members, including support by his accountant father and his brother Mark, who served as compliance chief for several years. In hindsight, critics have accused the firm of manufacturing conflicts of interest as a result of the closeness of its top leadership, saying that a compliance officer with close personal ties to a firm's founder may find it difficult to remain objective.
Insider Trading and Bond Mismarking Charges and Their Aftermath
On June 15, the federal government levied accusations of insider trading practices against three traders at Visium. Chris Plaford, of the firm's credit division, pleaded guilty to utilizing bogus bond quotes to mismark bond values and to insider trading. Another employee who faced charges of mispricing bonds, Stefan Lumiere, pleaded not guilty. Sanjay Valvani was a third money manager who was charged with insider trading. Just days after pleading not guilty to the charges, Valvani committed suicide, revealing the deep personal cost that comes with the Visium scandal.
Repeated Mispricing and Pay Issues
Plaford and Lumiere were charged with deliberately mispricing securities during a time period from at least 2011 through 2013. The cases against them assert nearly 300 instances of this illegal action, suggesting a company-wide endemic problem.
Individuals close to the company point out that its payment practices were also unorthodox. While most hedge funds paid money managers between 15% and 20% of profits as an annual bonus, Visium kept its bonuses to 10% or lower. This, in turn, allowed them to keep investor fees lower, making them a more attractive option for some investors. However, it may have also prompted some employees to take drastic and, apparently, illegal measures in order to make sufficient profits. According to the SEC charges, this environment may have combined with a set of policies company-wide which failed to effectively monitor employee communications and actions, opening the door for illegal activity.