Hedge Fund Sponsor Valued Private Company at Cost, Not Fair Value
A hedge fund manager was barred from the industry for several securities laws violations including failing to follow applicable fair valuation policies. According to the SEC, the fund sponsor valued an underlying private company investment at cost rather than valuing the security pursuant to ASC 820 as described in the fund’s financial statements. The securities represented interests in a private company in which the fund sponsor and other clients invested. As the company declined in value and ultimately filed for bankruptcy protection, the SEC charges that the fund sponsor failed to reduce the value below cost. The SEC charges that the fund sponsor also violated the custody rule. See blog.cipperman.com/2012/09/18/hedge-fund-manager-too-late-in-delivering-fund-financials.aspxas) and the anti-fraud rules by investing outside the PPM.
OUR TAKE: We have heard portfolio managers claiming that valuing a private security at cost is the most conservative valuation. This is obviously not true. Advisers must value securities at their fair value, which is generally the value that could be obtained in the market, as further described in the accounting rules.