Hedge Fund Manager Charged with Marking the Close
The SEC initiated a lawsuit against a hedge fund manager that it alleges artificially inflated the fund’s NAV by marking the close on the fund’s largest holding and directing the fund’s administrator. The SEC claims that the fund, contrary to its marketing materials, invested approximately half of its assets in one security. The SEC further charges that the defendant marked the close of the security by placing a significant number of buy orders on behalf of the fund and the defendant’s separate account clients at the end of the last trading of the month. This practice artificially raised the price of the security for purposes of calculating assets, performance, and fees. When marking the close ceased working, the defendant instructed its third party administrator to use a higher price on the basis that the market price was not accurate. The third party administrator did ultimately demand a rationale for using a different price, but the security had already begun a significant market decline. The SEC charges various violations of the antifraud provisions of the 1934 Act and the Advisers Act.