(Bloomberg) -- Sanjay Valvani helped Jacob Gottlieb build his Visium Asset Management into a hedge fund that at its peak managed $8 billion. Now he has put its future in doubt.
Valvani, 44, was accused on Wednesday of insider trading and reaping more than $32 million from trades in drug companies using secret tips, according to federal prosecutors. Valvani, a money manager and a top lieutenant of Gottlieb, was one of four people, including two former Visium employees, charged with securities fraud.
The allegations may end Gottlieb's ambition of turning his New York-based firm into a diversified hedge-fund giant akin to Ken Griffin's Citadel and Izzy Englander's Millennium Management. Visium has been seeking to sell its multimanager platform and clients have asked to withdraw at least $2 billion this quarter after the government's probe was disclosed, people familiar with the matter said.
While Gottlieb and Visium weren't accused of wrongdoing, criminal charges against individual money managers have forced other hedge fund firms to close their doors in the past.
"These recent charges are very serious and at the very least raise concerns about compliance oversight at the firm and should result in a number of investors reevaluating whether they want to stay with the fund," said Don Steinbrugge, managing partner of hedge-fund consulting firm Agecroft Partners in Richmond, Virginia.
GOVERNMENT'S CHARGES
Valvani is accused of trading on tips about drugs that were seeking generic status from the U.S. Food and Drug Administration, according to prosecutors. The government also charged former Visium money manager Christopher Plaford, 38, in the scheme, as well as in a separate case involving the mismarking of securities. In that case, former Visium employee Stefan Lumiere, 45, who was Gottlieb's brother-in-law, was also charged.
Plaford has pleaded guilty and is cooperating with the government. Lawyers for Valvani and Lumiere said their clients are innocent.
Gottlieb said through a spokesman that he was "deeply saddened" by the events.
'HUNGRY' MANAGER
Valvani, a native of Kalamazoo, Michigan, and son of Indian immigrants, worked at Visium since its inception in 2005 and was a partner at the firm.
His ties to Gottlieb -- a trained medical doctor -- go back further. In 2003, Valvani, then a sell-side associate in health care at Salomon Smith Barney, joined Gottlieb as an analyst at Balyasny Asset Management. Gottlieb was a money manager there, according to an alumni profile of Valvani by Duke University's Fuqua School of Business. Two years later, Gottlieb spun out his health-care strategy, bringing along a team of 20 investment professionals including Valvani.
"I really had to convince Jacob Gottlieb that I was hungry to join his hedge fund," Valvani, who joined Balyasny in 2003, said in the Duke profile. "I work hard and try to be the best at what I do, which is why a hedge fund is so suitable for me -- here I have a lot of control over my own destiny."
HEALTH-CARE EXPERTISE
Gottlieb's health-care expertise was the draw of his main fund, Visium Balanced Fund. The hedge fund had grown to $2 billion by the end of 2007. The strategy, which includes performance before Gottlieb started Visium, gained an annual average of 13.5% since its 2001 inception through the first quarter of this year, according to an investor letter obtained by Bloomberg.
Valvani ran part of that fund, overseeing a portfolio of specialty-pharmaceutical stocks. His performance was so good that rivals at other hedge funds would question Visium employees at conferences about Valvani's confidence in his trades, a former colleague said. Valvani managed as much as $2 billion, including borrowed money, before he was put on leave in April.
Gottlieb soon started to expand the firm beyond health-care stocks. In 2009, Visium launched a standalone multistrategy fund, called Visium Global, and a credit pool. As of last year, it managed five hedge funds and a mutual fund, and was seeking to raise $500 million for a private equity vehicle.
EXPLORING A SALE
"We're committed to running a very high-quality, high-integrity firm," Gottlieb told Institutional Investor in a 2012 interview in which he outlined his ambition to build a multiproduct and multistrategy investment giant.
Visium first told investors in March that it was being investigated by the government for its use of a consultant and trading in certain securities as well as the valuation of a credit fund that closed in 2013.
Visium has held talks regarding its multimanager platform with firms including AllianceBernstein Holding LP, according to a person with knowledge of the matter. Jonathan Freedman, a spokesman for the New York-based firm, didn't return messages seeking comment.
Assets under management at Visium had dropped to $7 billion at the end of March, from $8 billion in February. The firm employs more than 170 people in New York, London, and San Francisco.
PERFORMANCE SLUMPS
"I think it will be very difficult to sell the firm while the current legal proceedings are unfolding," Steinbrugge said. "It'll also make it significantly more difficult for them to raise money."
Recent performance isn't helping. The Balanced Fund lost 9.3% this year through end of May, said the same person. The multistrategy Global Fund fell 2.85% this year.
The cases against the Visium money managers bring hedge funds back into the government's crosshairs three years after billionaire Steven A. Cohen's SAC Capital Advisors pleaded guilty to securities fraud and paid a record $1.8 billion fine to settle insider-trading charges.
Several firms that were under scrutiny during the government's multiyear insider-trading probe shuttered after their employees were charged. FrontPoint Partners closed in 2011 amid client withdrawals after former health-care money manager Chip Skowron was charged with securities fraud. He was sentenced that year to five years in prison.
DIAMONDBACK'S EXAMPLE
Diamondback Capital Management closed in 2012 after former money manager Todd Newman was accused of insider trading. Though he was found guilty, prosecutors later dropped their charges and Diamondback was eventually refunded a penalty it paid to the government in connection with the case.
According to Wednesday's indictment, Valvani hired a consultant to get information about the approval status of a generic drug. Valvani is accused of using the information to trade in stocks, and passing the information to Plaford, who used it to trade credit default swaps, prosecutors said.
Plaford and Lumiere were charged over separate allegations that they used sham broker quotes to mismark the value of securities, inflating returns, and generated more than $5.9 million in extra fees, the U.S. said.
Plaford helped oversee the Visium Credit Opportunities fund, which returned 32% in 2010 before fizzling out when it closed in 2013, according to people with knowledge of the matter.
Valvani pleaded not guilty and was released on a $5 million bond. Lumiere was released on a $1 million bond.
Gottlieb has also been involved in a high-profile divorce battle with Lumiere's sister, Alexandra, over a prenuptial agreement that she signed shortly after she became pregnant with their second child. They were married in 2007, and Gottlieb filed for divorce in 2012, according to court papers. Lumiere left Visium the following year, according to his LinkedIn.com profile.
Alexandra lost a suit contesting the agreement, and will receive about $1.6 million, in addition to childcare expenses. Gottlieb, who reported a net worth of $188 million in 2013, will provide her and her children with a luxury apartment in New York City where she and their children will live while they are growing up.
