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Former Goldman Sachs Group Inc. partner Michael L. Smirlock is in trouble again. A federal grand jury in New York indicted Smirlock last week on charges of securities fraud for allegedly concealing $71 million in losses in the portfolio he managed for three hedge funds. The U.S. Attorney’s office in Manhattan filed a two-count indictment against Smirlock accusing him of defrauding investors while he was head of Laser Advisers Inc., a defunct Short Hills, N.J.-based investment advisory company. He faces up to 15 years in prison if convicted and at least $1.25 million in fines. The U.S. Securities and Exchange Commission has also commenced a related civil action against Smirlock and Laser. In the criminal indictment, the U.S. Attorney’s office in Manhattan alleged Smirlock, 44, of Loveladies, N.J., defrauded three hedge funds which were shareholders of an intermediary investment vehicle that he managed. The vehicle was called Steed Finance LDC, a Cayman Islands entity that maintained a portfolio of investments. Smirlock’s responsibility included guiding Steed’s investment strategy by valuing its portfolio each month and then disclosing that valuation to the hedge funds. Specifically, the indictment alleges that beginning in December, 1997 through July, 1998, Smirlock defrauded its hedge-fund clients by misrepresenting the value of one of the Steed fund’s investments — options to purchase interest rate swaps, also called “swaptions.” Since swaptions are thinly traded and difficult to value, Smirlock was required to get independent price valuations from broker-dealers. But when interest rates declined in the United States, the value of Steed’s portfolio became depressed, causing losses. Federal prosecutors contend Smirlock concealed those losses by changing the valuations. He allegedly forged and altered documents to falsely inflate the prices. He also allegedly removed pricing files from the trading desk in order to destroy or hide evidence of the fraud. The SEC complaint contended that in May 1998, Laser Advisers received a series of margin calls from a brokerage firm that questioned the valuations of holdings in the Steed portfolio. That triggered an internal investigation into prices between December 1997 and the first half of 1998. When Laser Advisers became aware of the alleged fraud, the company was forced to restate the April 1988 month-end valuations of Steed portfolio assets, disclosing that almost one-third of the assets had been overvalued. “The overall value of Steed’s portfolio had been overstated by approximately $71 million or about 17 percent,” the SEC complaint said. “The value of each of the Steed-related hedge funds had been overvalued by approximately 17 percent.” The defendant’s lawyer, William Brodsky of the New York firm Baden Kramer Huffman, & Brodsky, didn’t return calls seeking comment. This isn’t the first time Smirlock has gotten into trouble. He was a rising star at Goldman, renowned for his expertise in mortgage securities. He was chief investment officer for fixed income at Goldman Sachs Asset Management in the early 1990s where he managed about $45 billion for institutional investors and wealthy individual clients. But the investment bank suspended him in 1993 for violating record-keeping requirements set forth in the securities regulations. He resigned from Goldman later that year and settled charges with the SEC in which he agreed to pay a fine of $50,000. He was also suspended for three months from working with any investment adviser. These latest allegations include violation of that 1993 SEC action. He then was hired by Appaloosa Management LP before founding Laser in 1997. Before his employment at Goldman Sachs, Smirlock was a tenured professor of finance at the University of Pennsylvania’s Wharton School of Business. Copyright (c)2000 TDD, LLC. All rights reserved.

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