For Boaz Weinstein, whose credit fund had hemorrhaged money and investors over the past three years, April seemed like the turnaround moment.
The fund produced the best monthly return in its six-year history, a 10 percent jump that wiped out the pain of March when it suffered its biggest loss ever. From April on, there were no more losses, and he outpaced his rivals as volatility picked up in credit markets. Then on Friday, one of Canada’s largest pension plans and an erstwhile investor, said cheating may have contributed to the big swing — allegations that Weinstein soon called “utter nonsense.”
In a suit filed by the Public Sector Pension Investment Board, once one of the biggest investors in the $1.6 billion Saba Capital Management, the pension fund accused Weinstein of “shortchanging” it by marking down a “significant” portion of the fund’s assets after the retirement plan asked that all its money be returned at the end of the first quarter. The next month, after the pension’s exit, Saba raised the value of the holdings, according to the lawsuit.
Whatever the outcome of the dispute, the accusations could curtail future money-raising for Weinstein, 42, as he seeks to rebuild his business, which has been hit by a 20 percent loss from the beginning of 2012 through last year. The tumble caused clients to pull billions, and employees, including three long- time executives, to leave the firm that once managed $5.5 billion.
“Any suit of any nature against a fund manager will be a negative on a due-diligence checklist even if the suit is dismissed,’’ said Brad Balter, head of Boston-Based Balter Capital Management. “It’s not insurmountable, but it will be a hurdle to getting new investors.”
In a statement Sunday, Weinstein said he takes the allegations very seriously, even though they relate to only a “tiny portion” of the pension fund’s investment. “The valuation process was transparent, it was appropriate, it was fully vetted by auditors, counsel and others, and it was entirely fair,” he said. “The suggestion that I manipulated the valuation of two bonds for my personal gain is utter nonsense.”
The court fight could invite scrutiny from the Securities and Exchange Commission, which has cited valuations as one of its priorities this year and anticipates bringing cases involving pricing of portfolios.
“The SEC has several key concerns and valuation is one of them,’’ said Ron Geffner, a former SEC lawyer. In investigating cases of potential misvaluation, the SEC will look to see if a firm followed the methodologies disclosed in offering documents, its written policies and procedures and other client communications, said Geffner, now at Sadis & Goldberg LLP. If the investment manager deviated from its usual methods, the SEC will ask why the change occurred, he said.
John Nester, a spokesman at the agency, didn’t respond to a message seeking comment outside business hours.
The C$112 billion ($84 billion) pension fund, which oversees the retirement savings of Canadian federal public servants, said it was the Saba Offshore Feeder Fund’s largest investor, having invested $500 million over the course of 2012 and 2013 and accounting for 55 percent of the fund’s assets. The plan said it had asked Saba for its money back early this year, saying Saba’s 2014 losses appeared to be “unrelated to any market development that could or should have adversely affected the fund’s performance had the fund been properly managed,’’ according to the lawsuit.
Saba couldn’t adequately explain the losses, the Montreal-based pension fund wrote. The pension said it rejected a request by Saba to return capital in three installments, a move that allegedly would hide the redemption from other clients. By late January, clients accounting for 70 percent of the assets in the offshore fund asked for their money back.
The suit filed in Manhattan state court centers on hard-to- sell McClatchy Co. bonds owned by Saba. Between late January and the end of the quarter, there was only one trade done in the bonds that was for greater than $500,000 in notional value. Weinstein was looking to sell about $54 million in the bonds, according to a person familiar with the firm.
Normally, the hedge fund used independent pricing services or brokers who regularly traded the bonds, and these sources valued them at 50 cents to 60 cents on the dollar at the end of the first quarter, the pension plan said. When the pension asked for its money back, Saba used a different process called “bid wanted in competition,” a sort of auction used to trade a block of securities. That method valued the bonds at 31 cents as of March 31. Saba did not sell the bonds, and within a month, returned to its usual pricing methodology, marking the bonds in the 50s, the pension plan said.
“They did so to stanch further investor defections from the fund and to directly benefit themselves by boosting the residual value of their investments in the fund and other affiliated hedge funds with exposure to the same bonds,” according to the lawsuit. The pension plan, which is represented by law firm Skadden Arps Slate Meagher & Flom LLP, is asking for unspecified compensatory damages and disgorged profits.
Weinstein denied that he changed his pricing methodology in April. “We continued to use the auction to price those (and other) bonds in the second and third quarters of 2015,” he said in the statement. “PSP could have corrected its mistake with a one-minute phone call to me.”
Weinstein said he used the same auction process to sell 29 other bonds, prices that the pension fund didn’t challenge. “We couldn’t discard two of the prices resulting from the auction simply because PSP was unsatisfied with the outcome; to do so would have been improper and unfair to every other Saba investor,” he said. “I am 100 percent committed to treating all of my investors fairly, and I did exactly that in connection with PSP’s redemption."
‘Price for Liquidation’
Weinstein started Saba — Hebrew for grandfather — in 2009, after he stepped down as co-chief of the credit business at Deutsche Bank AG, where in 2008 he lost at least $1 billion. It was his only losing year out of 11 at the bank, a person familiar with knowledge of the matter said at the time. At Saba, where he trades on price discrepancies between loans, bonds and derivatives, he initially produced strong profits, gaining 11 percent in 2010 and 9.3 percent the following year. Then he struggled as as central banks embraced quantitative easing that reduced volatility in credit markets.
Saba returned 7.6 percent this year through Friday.
Uzi Zucker, an early investor in Saba who pulled some of his money in the first quarter, called the suit unprofessional.
“It’s just sour grapes,” he said. “He had to price for liquidation. I never questioned his judgment.”
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