A hedge fund firm agreed to pay over $10 Million in fines, disgorgement and interest for failing to stop two portfolio managers from using sham broker quotes in a scheme to inflate fund NAVs. The SEC faults the firm for failing to observe its own valuation procedures by allowing the PMs significant influence to override pricing services, failing to conduct adequate due diligence of the brokers, and neglecting to obtain at least 3 broker quotes for a price override. The SEC also fined and barred the firm’s CFO for failure to supervise by ignoring red flags such as the frequency that the PMs overrode prices and that overrides almost always resulted in higher valuations. The SEC previously charged the portfolio managers.
OUR TAKE: Investment firms and supervisors cannot turn a blind eye to questionable valuations and performance. According to the SEC, the respondent collected over $3 Million in unearned performance and management fees, making the firm ultimately responsible for its employees’ wrongdoing.
The SEC fined and censured a fund administrator for causing a money market fund’s violations of the Investment Company Act. The SEC asserts that the administrator used a flawed valuation methodology that resulted in violations of Rule 2a-7. The fund was used as a vehicle to invest securities lending collateral for the benefit of affiliated mutual funds. Because the fund failed Rule 2a-7, the investments by the registered funds violated the affiliated transaction rules.
OUR TAKE: As was the case with another recent case against a fund administrator, the SEC will broadly interpret the securities laws to hold non-registrant service providers accountable as gatekeepers of the securities markets.
A fund administrator agreed to pay over $560,000 to settle charges that it caused its client’s violations of the Advisers Act’s antifraud provisions. The client defrauded clients (and ultimately went to prison) for misappropriating client assets by creating fake loans in which the fund invested. The fund’s custodian declined to book the fake loans because they lacked sufficient backup documentation. Regardless, the administrator included the loans in the fund’s NAV even though, according to the SEC, it knew that the custodian excluded the loans. The SEC faults the administrator for failing to further investigate, notify the board or shareholders, or exclude the loans from the NAV calculation.
OUR TAKE: Although it may be a legal stretch to assert that a fund administrator caused a fraudulent client’s illegal conduct, the SEC will hold securities markets gatekeepers accountable for their client’s behavior. Service providers must conduct due diligence before accepting a client or risk being found guilty by association.