Boaz Weinstein's fund is being sued on the charge of 'manipulating the value' of its assets

One of Canada's largest pension boards is suing Saba Capital, the hedge fund run by credit trader Boaz Weinstein, for allegedly "manipulating the value" of their investments in a fund.

The Public Sector Pension Investment Board had $500 million in the Saba Offshore Feeder Fund, making it the fund's largest investor.

In a complaint filed Friday, it accused Saba of marking down the fund's portfolio when the board asked for a redemption.

The suit accused Saba of "artificially manipulating the value of the Board's investments in the Fund in order to benefit defendants at the expense of the Board."

The pension board first invested $300 million in February 2012 in exchange for Class A shares. In June 2013, it made another investment of $200 million. Saba Capital, however, began to suffer declines, having losing years in 2012, 2013, and 2014.

The fund's assets began to dwindle. In March 2012, the fund had $3.9 billion in assets under management. By the summer of 2014, it was $1.5 billion, the complaint said.

At the beginning of 2015, PSP Investments requested to redeem all of its shares, effective March 31, 2015. According to the complaint, Saba Capital asked that they redeem in three installments. The pension board insisted on one full redemption.

The complaint alleges that Saba Capital "agreed to proceed with a full redemption, but improperly manipulated the values of certain of the Fund's assets with the objective of artificially depressing the amount to be paid to the Board in satisfaction of its full redemption request."

More from the complaint (emphasis ours):

In the first phase of this manipulation, defendants arbitrarily recorded a material markdown of the value of certain corporate bonds comprising a significant portion of the investment portfolio held for the benefit of the Saba Offshore Feeder Fund and its investors. Defendants engineered this one-time markdown in bad faith to deprive the Pension Board of the full amount of the redemption proceeds it was entitled to receive based on the value of the Fund's assets as of March 31, 2015. Just one month later, defendants abruptly marked the bonds back up to the values they recorded immediately prior to the redemption. They did so to stanch further investor defections from the Fund and to directly benefit themselves by boosting the residual value of their investments in the Fund and other affiliated hedge funds with exposure to the same bonds. As a result of defendants' self-dealing, the Pension Board incurred a substantial loss on its investment in the Fund, for which defendants are liable.

In a statement, Saba Capital called the lawsuit meritless. Here's the full statement:

Saba Capital is disappointed that the Public Sector Pension Investment Board ("PSP") has chosen to file a meritless lawsuit over the valuation of two securities out of well over a thousand. The difference in value at issue amounts to merely 2.6% of the total of PSP's former investment with Saba.

As was explained to PSP in writing earlier this year, these two securities were priced using an industry-standard bid wanted in competition (BWIC) process, soliciting competitive bids from every leading broker and dealer in the relevant securities. The BWIC process was fully consistent with Saba's valuation policy, and was carefully vetted and approved not only by Saba's internal valuation committee, but by at least four external advisors: auditors, outside counsel, fund administrator, and Saba's external members of its board of directors.

Contrary to the allegations in PSP's complaint, Saba did not use the BWIC prices for a single month and solely for purposes of PSP's redemption, but rather continued to use BWIC pricing as appropriate in the second and third quarters of 2015. Moreover, the results of the BWIC process were accepted by PSP more than 90% of the time, for dozens of securities. In only two instances - the two at the center of PSP's lawsuit - did PSP take issue with the prices obtained by the BWIC process. PSP's cherry-picked objection to these two prices has no legal merit.

Saba Capital took great care in redeeming PSP's investment on a time-table dictated by PSP, including by finding fair and accurate market prices for extremely illiquid positions. Saba Capital looks forward to vindicating its position in court.

Before founding Saba in 2009, Weinstein was the cohead of credit trading at Deutsche Bank. In 2011, he made headlines for being the trader who took the other side of JPMorgan's disastrous "London Whale" trade. At its peak, Saba managed $5.5 billion in assets.

PSP Investments manages the assets of the pension plans of the Canadian Forces, the Royal Canadian Mounted Police, the Reserve Force of Canada, and the Public Service of Canada.

The suit, Public Sector Pension Investment Board v. Saba Capital Management, L.P. et al, was filed Friday in New York County Supreme Court.