Senior Managing Director Faten Sabry was retained by the Department of Justice in United States of America v. James Velissaris, a case against a portfolio manager, to provide analysis on the valuation of over-the-counter (OTC) derivatives and the reporting of net asset value (NAV) of a mutual fund and a hedge fund. The portfolio manager was alleged to have inflated the valuation of the funds’ holdings by over $1 billion, with the level of inflation spiking in March 2020 following the COVID-19 market crash, and thereafter. Dr. Sabry filed an expert report that analyzed the inputs, assumptions, valuation models, and parameters used by the portfolio manager to value the OTC derivatives in a third-party proprietary model. Nearly all the reviewed OTC derivatives were highly illiquid variance swaps, volatility swaps, correlation swaps, and credit default swaps, in addition to plain vanilla interest rate swaps.

Dr. Sabry documented several types of alterations of the valuation inputs and parameters and quantified the impact of the alterations made in the reviewed OTC derivatives on the NAVs of the hedge fund and mutual fund over time. For the positions she analyzed, she concluded the valuations were inflated in a significant way. In addition, Dr. Sabry examined the OTC derivatives that demonstrated inconsistent or implausible valuations.

Dr. Sabry also generated valuations using the appropriate inputs and parameters, which were consistent with the OTC derivatives counterparties’ marks, to estimate the degree of valuation inflation. Dr. Sabry then revalued the NAV of the entire hedge fund and found the inflated valuations resulted in the investors paying tens of millions of dollars in excess management fees and performance fees.

Judge Cote denied a defendant’s motion to preclude Dr. Sabry’s testimony. The case was resolved on the eve of trial as the defendant pled guilty to a charge of securities fraud and agreed to forfeit millions of dollars in proceeds. The defendant was later sentenced to prison.