Marking to model, and marking to hope

Graduate · enrolled learners

This lesson opens with Visium Asset Management, 2016.

What happened

Visium was a large asset manager, running more than 7.8 billion dollars, and from at least July 2011 to December 2012 two portfolio managers of its credit fund, Christopher Plaford and Stefan Lumiere, mismarked the thinly traded healthcare bonds and loans it held: the SEC found they asked three friendly brokers for the specific prices they wanted and had the brokers send those prices back as the brokers' own quotes, then used the quotes to override the prices the fund's independent administrator would otherwise have used. Visium relied on sham quotes at least 308 times, and 282 of those overrides, about 92 percent, moved a position's value in the fund's favor, overstating its month-end net asset value by about 2.4 to 7.2 percent and earning Visium about 3.15 million dollars in fees it should not have charged. The credit fund closed in 2013 after a run of redemptions. In June 2016 the two were charged; the same week another Visium manager, Sanjay Valvani, was charged in a separate insider-trading case and died days later, and Visium announced it would liquidate its main funds. Lumiere was convicted at trial and in June 2017 sentenced to 18 months in prison, and in 2018 Visium settled the SEC's charges without admitting or denying them. The pricing was not a good-faith model that happened to be wrong; it was a value chosen first and then dressed in the appearance of independent support, marking to hope and reverse-engineering the evidence to fit. A solicited quote from a friendly broker looks like an independent price and is nothing of the kind, so the mark had the form of verification without the substance.

The decision point

Marking an illiquid position means assigning it a value in the absence of a market price, and the honest version grounds that value in real evidence, while the dishonest version chooses the value first and then reverse-engineers evidence to support it, marking to hope rather than to reality. Visium is the case: two managers who did not want to mark bonds where the market put them solicited sham quotes from friendly brokers, values engineered to match the marks they wanted, and used them as fake independent support, inflating the fund's reported value until the fund closed, and when the charges came in 2016 the firm wound down. This sharpens the prior lesson on governance: it is not enough that a mark be checked; the check itself must be genuinely independent, because a solicited quote looks exactly like an independent price and provides none of the discipline, so verification can be faked as easily as the mark. The distinction that matters is between a value grounded in real evidence, actual transactions, unsolicited third-party prices, observable comparables, and a value reverse-engineered to a desired number and then decorated with evidence procured to fit. So the discipline is to demand that the evidence behind a mark be real and independent, to treat solicited quotes and friendly confirmations as no evidence at all, and to be suspicious precisely when the supporting prices arrive exactly where they are needed, because Visium shows that marking to model becomes marking to hope the moment the value comes first and the evidence is fetched to justify it, and a mark with the form of verification but not the substance is worse than no mark, because it looks trustworthy while being a wish.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

It is free. We do not sell the list and there is nothing to buy at the end of it.