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.
The SEC fined and barred an investment bank’s head CMBS trader for lying to customers about pricing, spreads, and compensation over a 2-year period. According to the SEC, the defendant oftentimes used elaborate stories and doctored documents to support his untrue statements. The SEC asserts that clients relied on the incorrect information when making purchase/sale decisions. The SEC maintains that the respondent knowingly ignored compliance policies requiring truthfulness in dealings with customers. The defendant benefited through higher discretionary bonuses resulting from his illicit activities, thereby making him directly liable for securities fraud.
OUR TAKE: It is noteworthy that the SEC took action against the trader himself rather than his firm, which presumably avoided liability because it had implemented adequate policies and procedures. SEC Commissioner Piwowar has previously indicated that the SEC should pursue individuals rather than firms.