Ex-Hedge Fund Manager Gets 4 Years In Prison
Former Millennium Global Investments portfolio manager Michael Balboa was sentenced to four years in prison for defrauding investors by inflating the value of Nigerian sovereign debt by $80 million.
Balboa, convicted in December in a retrial in Manhattan federal court, had faced a possible life sentence because of the size of his fraud. The U.S. said investors lost more than $390 million based on Balboa’s misstatements.
The life sentence recommended under non-binding federal guidelines “vastly overstates the seriousness of the offense,” U.S. District Judge Paul Crotty said in imposing a lesser term last month.
The judge also rejected the recommendation by U.S. probation officials for a 12-year sentence. He said leniency was warranted because Balboa, 45, was the sole means of his family’s support and because of his history and character.
Balboa, a London-based investment manager, was convicted of providing fake valuations to inflate month-end market prices on Nigerian warrants. The scheme generated millions of dollars in management and performance fees for which he earned as much as $6.5 million, prosecutors said.
Balboa’s fund was liquidated by London-based Millennium amid the financial crisis. His portfolio had almost $1 billion in losses, the U.S. Securities and Exchange Commission said in a lawsuit against him.
Jurors convicted Balboa after a second trial in December on five counts, including securities fraud and wire fraud, after the jury at his first trial was unable to reach a verdict.
Defense attorney Joseph Tacopina had suggested a prison sentence of one year to 18 months. He said prosecutors recognized at the trial that the fund’s collapse in October 2008 stemmed from the financial crisis and not Balboa’s actions.
A sentence of even 12 years would be “shocking,” Tacopina said.
Crotty also ordered Balboa to pay more than $390 million in restitution and forfeit $2.2 million.
Investors Seeking To Alter Hedge-Fund Fees Backed by IRS Ruling
The U.S. Internal Revenue Service issued a ruling clearing the way for institutional investors to seek changes to incentive fees assessed by hedge funds, which may make it cheaper for them to invest in such offerings.
Last month’s ruling, 2014-18, clarifies that hedge funds can charge incentive fees cumulatively rather than annually without running afoul of a tax law change adopted in 2008. These fees, typically equaling 15% to 20% of an investor’s profits, comprise a big portion of a hedge-fund manager’s annual revenue.
Institutions have been pushing managers to charge incentive fees on a cumulative basis, rather than locking in a share of profits annually, to ensure that both sides share the risk of having gains from good years being wiped out later on. Investors from California Public Employees’ Retirement System to the Utah Retirement System to Intel Corp. have urged hedge funds to make the change and have been spurned in the past, said Rick Ehrhart, chief executive officer of Optcapital LLC, a Charlotte, N.C., consulting firm specializing in incentive compensation payable to money managers.
“The holy grail for them is to divide profits on a cumulative basis,” Ehrhart said in an interview. “There is an inherent clawback” in using this sort of method, Ehrhart said, referring to a private-equity concept that allows investors to take back fees paid to managers if early gains in buyout funds are wiped out by subsequent losses.
Eric Smith, an IRS spokesman, confirmed that the agency had issued the revenue ruling, declining to comment further.
The ruling addresses an issue that arose after Congress passed the Emergency Economic Stabilization Act of 2008, which, among other things, curtailed the ability of hedge funds to defer taxes on billions of dollars in incentive fees. Hedge funds have said that its unclear whether cumulative incentive fees would comply with a provision added to the Internal Revenue Code under the 2008 law known as Section 457A.