Defunct Hedge Fund Firm Fined for 2008-09 Valuation Failures
The SEC sanctioned and fined a hedge fund manager that wound down business in 2009 for compliance violations involving fair valuation, disclosure, and cross trading. The SEC charges that the fund manager, which wound down operations and withdrew from registration in 2009, did not follow its valuation procedures with respect to MBS, ABS, CDO, and other non-widely quoted securities. Rather than following the process described in its PPM, the SEC alleges that the firm used its own discretion in valuing securities, which, in most cases, resulted in higher values that had it applied its stated procedures. The SEC also charges that the firm did not document how it came to its valuations and that its valuation committee ratified portfolio management decisions without documentation. The SEC also asserts that the firm failed to document the basis for cross-trading valuations between a fund it managed and a separate account client. The SEC charges violations of the compliance rule (206(4)-7).
OUR TAKE: Regulators have more reach than creditors because the SEC can still impose fines and sanctions even after you cease operations. With respect to valuation, firms must document valuations that deviate from market data, and fair valuation committees must demand documented justification for ratifying any discretionary valuation decisions.