Nomura, Mizuho face losses on All Blue fund’s failed trades

NOMURA Holdings and Mizuho Financial Group are facing more than US$100 million of potential losses tied to a series of failed stock trades made by investment fund All Blue Capital.

All Blue, led by trader Matt Novak, made a series of wrong-way short bets with multiple counterparties earlier this year and was allegedly unable to settle the trades, according to New York legal filings and sources familiar with the matter. Two units of the fund were placed into liquidation in the British Virgin Islands in March, the filings show.

The fund’s inability to settle its bets triggered a chain of events that has left Tokyo-based Nomura nursing a possible loss of 14 billion yen (S$123.4 million), the sources said. Mizuho has separately claimed All Blue owes it US$19 million that it has yet to repay, according to the filings, which are part of an ongoing legal action that Mizuho has taken in New York. The fund is contesting the lawsuit.

The size of the potential losses raises questions about the risk management practices at two of Japan’s largest banks. Wall Street giants around the world have been under pressure to improve their monitoring of high-risk investment funds. Nomura has spent years repairing its internal controls after losing almost US$3 billion on the collapse of Archegos Capital Management in 2021, an affair that also saddled Mizuho with losses.

Spokespeople for Nomura and Mizuho declined to comment. A lawyer for All Blue said the company will vigorously defend itself against Mizuho’s claims. Novak did not respond to multiple requests for comment.

Nomura’s provision

Last month, Nomura said it had set aside funds to cover the potential loss. The provision weighed on the banking giant’s results in the first quarter. Nomura’s European subsidiary posted a pretax loss for the period, contrasting with the firm’s domestic business that thrived amid resurgent markets in Japan.

At the time, chief financial officer Takumi Kitamura said an “incident” had occurred at the bank’s Instinet subsidiary involving a UK broker that made an order for a stock trade. That broker is Avalon Capital Partners, a London-based firm that arranged some of the transactions on All Blue’s behalf, the sources said.

“We are currently conducting various investigations to recover the debt,” Kitamura said, without elaborating. “All transactions with that broker have been settled, and all losses arising from this transaction have been booked in the quarter.”

A spokesperson for Avalon, which was co-founded by Jean-Yves Aknin, told Bloomberg in an e-mailed statement that a client “failed to settle a number of trades” in February and that the firm notified the UK’s Financial Conduct Authority “immediately”. The spokesperson did not identify the client and declined to comment further.

Brokerage firms such as Avalon operate as middlemen in the world of Wall Street trading, matching buyers and sellers. It’s typically the responsibility of their end clients to deliver the shares or cash that settle trades.

All Blue

Novak, a former emerging-markets trader at Commerzbank, is a partner at All Blue and has worked at the company since 2016, according to his LinkedIn. The company invests across private equity, venture capital, real estate and other assets. The fund has also agreed to participate in a convertible debt offering tied to Digital World Acquisition, the special-purpose acquisition company that merged with former US President Donald Trump’s social media firm, according to the Financial Times.

In 2022, Novak said he moved All Blue’s headquarters to Dubai, part of the growing class of hedge funds choosing to expand in the Middle Eastern business hub.

Mizuho lodged its claim against All Blue in New York in March, alleging the fund failed to settle its debts and evaded communications. The fund, which denies any wrongdoing, has responded by describing the Japanese bank as a “disgruntled purported unsecured creditor” seeking to “cut in line ahead of other creditors and investors”, filings show.

Mizuho’s lawsuit

All Blue opened an account with Mizuho’s US arm late last year, according to the bank’s lawsuit. In February, the fund placed a bet that the stock of Super Micro Computer, a San Jose, California-based server maker, would decline in value using 190,000 of the firm’s shares.

Super Micro’s shares have soared more than 150 per cent this year and the stock gained 64 per cent in February alone. A jump in demand for the equipment that powers artificial intelligence applications has caused the company’s revenue to surge.

Novak’s firm failed to repay all the securities, leaving Mizuho with a US$19 million loss, according to the filings. Mizuho officials struggled to track down Novak as they went looking for their money, according to the claim.

Lawyers acting for All Blue told the court in recent weeks that a unit of the fund had been liquidated towards the end of March. Novak signed off on the entity closing down and the insolvency is being handled by practitioners at R&H Restructuring, according to a letter produced for the proceedings.

“Trader Matt [Novak] has been offline in chats all week,” one Mizuho banker said in e-mails discussing the trade, weeks after it was supposed to be settled. “We cannot connect with him.” BLOOMBERG