Private Equity Execs Punished by SEC for Valuation Issues
Three private equity executives were fined and censured for mis-valuing assets held in a fund registered as a business development company. The SEC charges that the executives failed to follow FAS 157, which requires registered investment companies to value assets not traded on an exchange based on an exit price that reflects “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” Instead, the SEC alleges that the firm mis-classified certain securities as Level 3 to avoid marking down the assets. The SEC also charges that the firm used valuation methodologies that resulted in higher values than using the FAS 157 methodology. The fund thereby overstated its net asset value and filed misleading financial statements.