Hedge Fund to Pay Nearly $9 Million for Weak Valuation Process
The U.S. parent of a London-based hedge fund agreed to pay nearly $9 Million in fee disgorgement and penalties for over-valuing a private equity investment. The SEC asserts that the respondent, which had initially valued the company using a discounted cash flow methodology, knew that the investment’s valuation had declined because of market factors and information received from third parties. However, the SEC alleges that the firm never provided the relevant information to its pricing committee or provided the information with insufficient explanation and time for review. The SEC also asserts that the firm did not have a consistent valuation process and did not properly document valuation determinations. As a result of the overvaluation, the SEC claims that the firm wrongfully collected nearly $8 Million in management fees. Although neither the hedge fund nor its parent was registered as an investment adviser, the SEC charges that the parent company, which had securities registered under the 1934 Act, violated its obligations to maintain adequate internal controls and included misleading information in various SEC filings.
OUR TAKE: We cannot over-emphasize the importance of a consistent process and documentation when valuing securities that do not have a published market price. Such process and documentation will serve as your regulatory defense when examiners question valuations.