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United States v. Lumiere

United States District Court, S.D. New York

April 19, 2017

UNITED STATES OF AMERICA
v.
STEFAN LUMIERE, Defendant.

          OPINION AND ORDER

          JED S. RAKOFF, U.S.D.J.

         On January 19, 2017, following a six-day trial, a jury found defendant Stefan Lumiere guilty of wire fraud, securities fraud, and conspiracy to commit those offenses. See Verdict, ECF No. 65. The basic charge was that the defendant, a former employee of Visium Capital Management ("Visium"), had participated in a two-year scheme to dupe investors into believing that the Visium Credit Opportunities Fund (the "Credit Fund") was performing far better than it actually was. Lumiere now moves for a new trial pursuant to Rule 33(a) of the Federal Rules of Criminal Procedure. For the reasons stated below, Lumiere's motion is hereby denied.

         The evidence at trial (taken, along with all reasonable inferences, most favorably to the Government) showed as follows:

         Visium was a hedge fund manager that operated several different hedge funds and that, at its peak, had $8 billion of investor money under management. See Tr. 40, 42. Among the hedge funds it managed was the Credit Fund, which invested principally in bonds, bank debt, and other credit instruments, and which managed up to $500 million. See Tr. 42-43, 630-31. The Credit Fund performed well through 2010, but in 2011, its performance began to suffer. See Tr. 248-49; Government Exhibit ("GX") 117.

         In 2011, Christopher Plaford was the senior portfolio manager for the Credit Fund, and was responsible for directing the fund's investment process. See Tr. 45, 630-31, 651; see also GX 106. Lumiere, who reported to Plaford, was a senior analyst and also a portfolio manager responsible for around $100 million of the Credit Fund's investments. See Tr. 146-47, 244-46, 664-65. Jason Thorell was the trader for the Credit Fund, which meant that he executed trades as directed by Plaford, Lumiere, and others. See Tr. 241-42, 652-53. When the Credit Fund's investments began to suffer in 2011, Plaford and Lumiere, with assistance from Thorell, hatched a scheme to defraud investors in the Credit Fund into believing it was still performing well. Plaford pleaded guilty to participating in the fraud and testified at trial under a cooperation agreement; Thorell, who was not charged, testified under a grant of immunity. See Tr. 222-23, 640-41.

         The key metric by which Visium reported the Credit Fund's performance to investors was its net asset value ("NAV"), which represented the aggregate fair market value of all investments and cash held by the hedge fund. See Tr. 60, 662-63. Investors also monitored the proportion of the Credit Fund's investments that were classified as illiquid "Level 3" assets under Accounting Standard Codification 820, and strongly preferred that the Credit Fund hold no Level 3 assets at all. See Tr. 663, 703-04; see also Tr. 63-66. Plaford and Lumiere also had personal stakes in the level of the Credit Fund's NAV, because the higher the NAV, the higher their compensation would be, whereas, by contrast, poor performance could result in their termination. See Tr. 248, 664. Visium reported the Credit Fund's NAV and liquidity to investors on a monthly basis, see Tr. 661; thus, to achieve their goal of duping investors into believing the struggling Credit Fund was performing well and held no illiquid investments, Plaford and Lumiere crafted a plan to systematically manipulate both the NAV and the liquidity calculations, month-by-month, from 2011 to 2013.

         Plaford and Lumiere did not directly control the level at which the NAV was reported, since it was calculated by the back-office Operations group. However, to make the calculation, Operations relied to a significant degree on securities prices reported by the investment team - i.e., by Plaford and Lumiere. At the end of each month, the investment team would send Operations a list of prices for each security held by the Credit Fund. See Tr. 560-61. The next business day, Operations would obtain market prices for each security from a third-party pricing source such as Markit, and then send to the investment team a spreadsheet that compared Visium's in-house prices with the third party prices. See Tr. 561-63. In order to cause Operations to use an in-house price instead of the third party's price in calculating the NAV, the investment team was required to provide independent verification that its in-house price was fair and accurate. This was known as "overriding" the third-party price. See Tr. 563-65, 667-68. A quote from an outside broker indicating that it would transact in a security at the investment team's in-house price was, however, sufficient to override a third-party price. See Tr. 564-65. Thus, beginning in mid-2011, Plaford and Lumiere began suborning outside brokers to provide, on demand, assurances regarding whatever back-up securities price quotes Lumiere asked for. Lumiere personally selected and corrupted the two main brokers used for this purpose: Scott Vandersnow of Princeridge and Jonathan Brook of Janney Montgomery Scott. See Tr. 285, 293-94, 305, 483, 680-81. In addition to being personal friends of Lumiere, Vandersnow and Brook worked at firms that did not usually trade the type of securities the Credit Fund held, and thus could not realistically be counted on for objective price quotes. See Tr. 314-15, 351; GX 1224. Later, at Lumiere's suggestion, Thorell located a third corrupt broker, Matthew O'Callaghan of Odeon Capital Management, another "bucket shop" broker whose services they occasionally used as well. See Tr. 306-09. The brokers allowed Lumiere and his co-conspirators to dictate the prices the brokers attested they were willing to pay. See, e.g., Tr. 489-91; GX 1209, 1227. In return for the brokers providing the sham prices, Lumiere steered business their way. See, e.g., Tr. 285-86, 294. All of this, needless to say, was concealed from everyone but the coconspirators. See Tr. 699.

         To implement this scheme, Plaford and Lumiere, toward the end of each month, would devise inflated prices for poorly performing securities. See Tr. 668, 674-75; see also Tr. 684-91; GX 1208, 1212, 1216, 1228-30. Plaford would send Thorell a spreadsheet of the prices, and Thorell, at Plaford's direction, would then create a new email, attach that spreadsheet, and send it to Operations to begin the month-end NAV calculation process. See Tr. 252-57, 677-78. Meanwhile, Lumiere would contact Vandersnow and/or Brook (or, later on, O'Callaghan) and dictate the chosen prices; Vandersnow and Brook (sometimes while they were still on the phone with Lumiere) would promptly send Lumiere "verifications" of the demanded prices, without in fact independently verifying them. See, e.g., Tr. 286, 354-58, 361-62, 489-94, 679-80; GX 1209, 1227. To give a veneer of legitimacy, these exchanges were sometimes glossied-up. For example, Plaford might tell Lumiere that he thought a certain price was accurate, but that he was open to other views. See, e.g., GX 1230. Lumiere, in turn, might relay the prices to the brokers under the guise of "educating" them about Visium's perspective. See, e.g., GX 1227.

         All of this was simply window dressing intended to help conceal the fraud. Over the course of two years and hundreds of securities, none of the brokers ever disagreed with Lumiere's prices, nor was there any attempt to supply the brokers with information about the securities, with most of which they were unfamiliar. See Tr. 500-02, 675. Once the brokers dutifully supplied the dictated quotes, their emails would be sent to Operations as the necessary back-up documentation for Plaford's and Lumiere's hand-picked securities prices. See Tr. 276, 289. Thus did Lumiere and his co-conspirators grossly inflate the NAV. In addition, using broker quotes as back-up had the further advantage of preventing these securities, which were often thinly traded, from being classified as illiquid Level 3 assets. See Tr. 693.

         The details of the scheme varied slightly at times. For example, on one occasion, rather than rely on a sham broker quote as back-up, Lumiere himself purchased a security held by the Credit Fund at a significantly above-market price, and then used that "real-world" transaction as the back-up for the month-end pricing -a practice known as "painting the tape." See Tr. 638-39, 708-15. Sometimes Lumiere conveyed the bogus prices to the brokers by messengering them flash drives that contained only a spreadsheet of securities prices. See Tr. 364-66, 506-07, 682. And for a few months, acting at Lumiere's direction, it was Thorell, rather than Lumiere, who obtained the bogus broker quotes. See Tr. 358-62, GX 1234-A.

         Eventually, however, suspicion arose, and in April 2013, Lumiere was fired for poor performance. See Tr. 658, 679. Shortly thereafter, the remaining investment team was removed from the pricing process, and the scheme collapsed. See, e.g., Tr. 758-60.

         The evidence of the foregoing scheme introduced at trial was little short of overwhelming. It included a mass of documents (electronic and otherwise); audio recordings of the conspirators in action; and credible testimony from three of the conspirators (Platora, Thorell, and Vandesnow). The only real issue for trial was whether, as Lumiere maintained, he had a good-faith belief in the securities prices he obtained to boost the NAV.

         Under Rule 33(a), a district court "may vacate any judgment and grant a new trial if the interest of justice so requires." Fed. R. Crim. P. 33(a). "The test is whether it would be a manifest injustice to let the guilty verdict stand." United States v. Guang, 511 F.3d 110, 119 (2d Cir. 2007) (internal quotation marks omitted). In other words, "[t]he grant of a Rule 33 motion requires a real concern that an innocent person may have been convicted." United States v. Parkes, 497 F.3d 220, 232 (2d Cir. 2007) (internal quotation marks omitted). Lumiere contends that a combination of supposed evidentiary errors, putative prosecutorial misconduct, and allegedly flawed jury instructions - nearly all of which he did not object to at trial - resulted in an unfair trial. In actuality, however, there were no such errors, let alone the kind of egregious errors that would justify overturning the jury's verdict.

         Beginning with the evidentiary issues, Lumiere finds fault in a number of rulings made in connection with the testimony of Jason Thorell. Because Lumiere uniformly failed to object on the grounds he now advances, his arguments are reviewed under the "plain error" standard. See Fed. R. Crim. P. 52(b) ("A plain error that affects substantial rights may be considered even though it was not brought to the court's attention."). But, in fact, none of the rulings was erroneous, much less an "obvious" error that not only "affected the outcome of the district court proceedings, " but also "seriously affect[ed] the fairness, integrity, or public reputation of judicial proceedings." See United States v. Olano, 507 U.S. 725, 734, 736 (1993) .

         Lumiere first argues that a portion of Thorell's testimony interpreting a recording was improperly admitted as lay opinion testimony. Under Rule 701, lay witnesses may testify to an opinion only if it is "rationally based on the witness's perception" and is "helpful to clearly understanding the witness's testimony or to determining a fact in issue." See Fed.R.Evid. 701(a), (b) .

         At trial, the Government played portions of a recording Thorell made of a conversation he had with Lumiere in January 2014. In one excerpt played for the jury, the following exchange took place:

STEFAN LUMIERE: Yeah, I think, I think, the way we explain it from my perspective to investors is I don't want to blow everything they've done out. For example, Chris has been mismarking shit since the beginning.
JASON THORELL: Um-hum.
STEFAN LUMIERE: Right? Originally in 2011, he was marking them too low so he could save ear - like retaining earnings for a later date - JASON THORELL: Yeah.
STEFAN LUMIERE: - and smoothing them out.
JASON THORELL: Yeah.
STEFAN LUMIERE: So he's been doing that since the beginning. He's been mismarking shit egregiously - outside context of what was right from the beginning. But the things I'd like to focus on are stuff like ATI - JASON THORELL: Um-hum.
STEFAN LUMIERE: - and Chinamed - JASON THORELL: (indiscernible) Look, look. I, I - STEFAN LUMIERE: - which were just egregious. And I'd like to use that as a reason for my deciding to depart them.

         GX 1223-A. On direct examination, Thorell testified that "Chris" referred to Plaford, their former boss. See Tr. 237. The following exchange then occurred:

Q: When you spoke to Mr. Lumiere and he used the word "Chris did this, " what did you understand him to mean?
A: I understood him to mean that, in the context of this transcript, that he's speaking for Chris, but also himself.

See Tr. 238.

         Although he raised no objection at the time, Lumiere now claims that this testimony was inadmissible because it was not rationally based on Thorell's personal knowledge and because "Chris" was not a code that the jury needed cracked.

         But, in fact, this testimony was properly admitted. As a participant in the conversation, Thorell plainly had first-hand knowledge of the conversation itself. See United States v. Urlacher, 979 F.2d 935, 939 (2d Cir. 1992) ("[T]he first prong requires that a witness meet the familiar requirement of first-hand knowledge or observation." (internal quotation marks omitted)). Just as importantly, Thorell had first-hand knowledge of the conspiracy being discussed. Prior to explaining what he thought Lumiere meant by "Chris, " Thorell testified that he had participated in the mismarking scheme with Plaford and Lumiere, that he had been sufficiently distressed by the scheme to report it to Visium management, and that, when his concerns were not allayed, he reported the fraud to the SEC. See Tr. 223-25; see also Tr. 373-85, 388-89. He later explained the mechanics of the fraud in detail. See, e.g., Tr. 274-76, 364-66. In other words, Thorell not only had firsthand knowledge of what was actually said, but firsthand knowledge of the underlying scheme sufficient to interpret the statements of his former partner-in-crime. See United States v. Yannotti, 541 F.3d 112, 125 (2d Cir. 2008) ("DiDonato's testimony was rationally based on his own perception because it derived from his direct participation in the loansharking activities of the charged enterprise . . . .") .

         Thorell's testimony was also helpful to the jury within the meaning of Rule 701. The conversation Thorell was called upon to interpret took place in January 2014, after the conclusion of the years-long securities mismarking scheme. The recording thus contained the kind of shorthand and oblique references that only a person familiar with the background would readily grasp. Moreover, Thorell, as the most junior member of the conspiracy, had taken direction from both Plaford (who had Thorell send the override spreadsheet to Operations in Thorell's own name to mask Plaford's involvement) and Lumiere (who, inter alia, supplied the necessary back-up documentation for the overrides in the form of sham broker quotes). See Tr. 252-57, 276, 289. It is against that backdrop that Thorell testified that he understood Lumiere's references to "Chris" to mean both Plaford and Lumiere himself. Such testimony was plainly "helpful to clearly understanding the witness's testimony or to determining a fact in issue." See Fed.R.Evid. 701; Yannotti, 541 F.3d at 126 (upholding admission of "interpretative ...


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