United States v. Balboa

By: Catriona Coppler

In 2013, Michael Balboa was convicted of securities fraud, conspiracy to commit securities fraud, wire fraud, conspiracy to commit wire fraud, and investment advisor fraud.[1] Balboa was sentenced to forty-eight months imprisonment and ordered to pay $390,243, 873.92 in restitution.[2] On appeal, in United States v. Balboa,[3] Balboa challenged the sufficiency of the evidence supporting the conspiracy counts and the loss determination used to calculate his sentence.[4] The United States Court of Appeals for the Second Circuit found no merit in Balboa’s arguments and therefore affirmed the District Court’s judgment.[5]

Balboa, an employee of Millennium Global Emerging Credit Fund (“Millennium Global”), was the portfolio manager of the Millennium Global Emerging Credit Fund (“Fund”).[6] A portion of the Fund invested in payment-adjusted warrants issued by the Government of Nigeria based on the price of oil (“Nigerian Warrants”).[7] Investors of the Fund were told that an independent valuation agent would value the Fund’s holdings.[8] However, Balboa corrupted the valuation process by feeding inflated valuations, or marks, to financial brokers.[9] These inflated marks were then passed along to the independent valuation agent as if they reflected the prices that the brokers were actually seeing in the market.[10] Consequently, the Fund appeared to investors to be worth more than it really was.[11]

On Appeal, Balboa argued that the conspiracy charges could not stand because the co-conspirators did not know that the valuations Balboa gave to them were invalid.[12] The Court reviewed this challenge for plain error, which required that the error prejudicially affected Balboa’s substantial rights and seriously affected the “fairness, integrity, or public reputation of judicial proceedings.”[13] For an error to affect a defendant’s substantial rights, it must be prejudicial, or not harmless, and have affected the outcome of the district court’s proceedings.[14] Here, the Court found no such error.[15] Rather, the Court drew all reasonable inferences in favor of the government and held that a conspiratorial agreement may be established merely by proof of a tacit understanding.[16] So while the co-conspirators may not have known they were passing on inflated marks, the fact that the co-conspirators knew and admitted to helping Balboa defeat the valuation process was sufficient to demonstrate “purposeful behavior” that “furthered the goals of the conspiracy,” which therefore demonstrated a tacit understanding.[17]

The Court also rejected Balboa’s argument that the investors’ loss was a result of the 2008 global economic downturn rather than Balboa’s fraudulent scheme.[18] The Court rejected this argument because the economic downturn would not have affected investors had Balboa not fraudulently induced them to invest in the first place.[19] Rather, the Court held that when “an investor puts money into a fraudster’s hands, and ultimately receives nothing of value in return, his loss is measured by the amount of principal invested.”[20] As a result, the loss was the amount investors invested, which in this case was over $390 million.[21]

This case demonstrates how willing courts are to impose steep sanctions on those who engage in securities fraud. In this brief and succinct opinion, the Court quickly disposes of all arguments thereby illustrating that it is unwillingly to grant leniency to those that engage in clearly fraudulent behavior. Additionally, because the Court found no clear error in the sentence of forty-eight months imprisonment and $390,243, 873.92 in restitution, it demonstrates the Court’s willingness to impose heavy sanctions on those that engage in this type of fraudulent behavior.[22] As a result of this case, those who are thinking of engaging in securities fraud may be dissuaded now that courts have made it clear that such heavy sanctions are appropriate and very few defenses will be accepted. This could serve to deter those who are seeking to engage in securities fraud thereby resulting in safer, fairer markets.

[1] United States v. Balboa, 622 F. App’x 31, 32 (2d Cir. Nov. 18, 2015).

[2] Id.; Def.-Appellant’s Br. 14.

[3] 622 F. App’x 31 (2d Cir. Nov. 18, 2015).

[4] Id. at 32.

[5] Id. at 33.

[6] United States v. Balboa, No. 1(S1) 12 Cr. 196(PAC), 2013 WL 6196606, at * 1 (S.D.N.Y. Nov. 27, 2013).

[7] Id.

[8] Appellee’s Br. 2-3; accord Def.-Appellant’s Br. 3.

[9] Appellee’s Br. 3; accord Balboa, 2013 WL 6196606, at * 1.

[10] Appellee’s Br. 3.

[11] Appellee’s Br. 3; accord Balboa, 2013 WL 6196606, at * 1.

[12] Def.-Appellant’s Br. 16.