The SEC has charged a hedge fund firm and its principals with using false broker quotes and imputed valuations to inflate the value of securities. Facing significant investor redemptions and underperformance versus peer funds, the SEC claims that the principals expressed concerns about going out of business. In response, the SEC alleges, the respondents engaged in a scheme to obtain inflated broker quotes from a broker to whom they promised additional business. In addition, the SEC avers that the respondents used imputed mid-point prices to value securities, contrary to statements made in offering documents. Ultimately, the fund’s auditor questioned the valuations and refused to complete the audit.
OUR TAKE: Bad things happen when firms face failure. Many enforcement cases arise from firms and managers that desperately try to cut regulatory corners to avoid firm collapse. It is better to accept defeat than to try to rescue your career after the SEC names you in an enforcement case.