SEC Sues Hedge Fund Firm for Failing to Mark Down Impaired Assets
The SEC has filed suit against a hedge fund manager and its principals for over-valuing fund assets, lying to investors about valuations and the fair valuation process, and, thereby, collecting unearned fees. The fund invested in loans to, and convertibles in, small companies. The SEC alleges that the firm continued to hold assets at cost/face value even though the value of many of the companies became impaired during the credit crisis. The SEC charges that the firm did not follow the robust fair valuation procedures described in the PPM, the Compliance Manual, and marketing materials. The suit seeks unspecified damages but claims that the firm collected more than $10 Million in fees to which it would not have been otherwise entitled had valuations been done correctly. The respondent firm was not a registered investment adviser during the period of alleged wrongdoing but became registered in 2012. The SEC claims that this action is its seventh case arising from its Aberrational Performance Inquiry which uses proprietary risk analytics to identify and target hedge funds with outlier returns.