Fund Sponsor Sanctioned for Valuation Determined Later to be Unreasonable
The adviser to a hedge fund recently accepted a 12-month bar from the industry and a fine for utilizing a security valuation that the SEC deemed unreasonable. The respondent based his valuation of a privately-held asset management company (which accounted for over 70% of the portfolio) on four factors: a management repurchase offer, AUM, revenues, and comparisons to publicly-traded money managers. The SEC alleges that the respondent should have adjusted the valuation down four months later after the financial crisis that occurred in the fall of 2008. According to the SEC, “there was no reasonable basis to support” respondent’s valuation as of December 31. The respondent did ultimately adjust the valuation in 2010 after third parties hired by the respondent advised a lower valuation.