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Morning Brief: Citigroup Shares Surge on ValueAct Stake

ValueAct told clients in a letter that it thinks the bank is trading at "an extraordinary discount" to its intrinsic value.

Shares of Citigroup surged 3.7 percent to close at $71.02 after activist hedge fund ValueAct Capital disclosed it had built a $1.2 billion position in the banking giant over the past four to five months. In a letter sent to clients, a portion of which Alpha obtained, the hedge fund firm said it is continuing to add to the position. It paid about 10.5 times forward earnings and equal to book value for the stake, which it asserts “is an extraordinary discount to intrinsic value.”

ValueAct says a combination of slow-but-steady growth generated by Citigroup’s core franchises as well as a return of excess capital by 2020 could generate 15 percent or more return on tangible common equity and double earnings per share from 2017 levels. Specifically, the hedge fund predicted that over the next two years Citigroup “can easily” return $50 billion of capital in the form of dividends and share buybacks without impacting its ability to achieve earnings growth targets. After that, ValueAct said the bank can “reliably return” at least $18 billion to $20 billion of capital each year while consistently growing its earnings base.

“Based on the share price at which we have been able to accumulate our stake in the company, we do not believe the market views Citigroup in the same way we do. Investors seem to spend a disproportionate amount of energy working to understand and predict sources of quarterly volatility that provide little insight into the long-term trajectory of the business,” ValueAct stated in its letter.

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Visium Asset Management settled charges with the Securities and Exchange Commission related to the mismarking of assets and insider trading. Separately, Visium’s chief financial officer Steven Ku agreed to settle charges that he failed to respond appropriately to “red flags” that should have alerted him to asset mismarking, according to the regulator.

The S.E.C. had found that two Visium portfolio managers inflated the value of securities held by hedge funds it advised, causing the funds to falsely inflate returns, overstate their net asset value and pay $3.15 million in excess fees to Visium. The S.E.C.’s order also stated that certain Visium portfolio managers illegally used confidential information to trade shares of drug companies as well as home health-care providers. In the separate order, Ku was found to have failed to supervise the two portfolio managers, Christopher Plaford and Stefan Lumiere.

In March we reported that the S.E.C. obtained a final judgment against Lumiere and barred him from the securities agency. Lumiere was sentenced last June to 18 months in prison after being convicted of securities and wire fraud. He was earlier accused of mismarking securities in a fixed-income hedge fund, which inflated the fund’s N.A.V. and liquidity from 2011 to 2013. Lumiere was also sentenced to three years of supervised release. He is one of three former Visium portfolio managers criminally charged by the Federal government for their roles in several securities violations. Plaford earlier pled guilty to seven criminal counts but has not yet been sentenced. In June 2016, the S.E.C. filed a complaint against Lumiere and Plaford, alleging that they engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm. The S.E.C. said its action against Plaford has been stayed pending the completion of the criminal case.

Visium portfolio manager Sanjay Valvani was also earlier charged with securities fraud and wire fraud connected to an insider trading scheme. He committed suicide several days after he was charged.

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Fort, a multistrategy quantitative investment firm, named Stu Bohart as president. He was most recently president of the liquid markets business of Fortress Investment Group. Prior to Fortress, Bohart held a number of senior positions at Morgan Stanley, including global head of prime brokerage and head of alternatives, eventually being named co-head of the asset management division and serving on the Morgan Stanley management committee. In addition, Christopher Snyder was named general counsel of Fort. He spent nearly 10 years at King Street Capital Management.

Sara Wolkoff became head of investor relations after spending nearly 13 years with Goldman Sachs. Fort was founded in 1993 by Yves Balcer and Sanjiv Kumar and currently manages $5.4 billion. Its Fort Global Contrarian fund was down 1.8 percent for the year through April 27, according to an HSBC document that tracks hedge fund performance. It gained 6.6 percent last year and less than 1 percent in 2016.

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