Large Bank Fined $55 Million for Over-Valuing Swaps
A large global bank agreed to pay a $55 Million fine to settle charges that it overstated its financial statements by failing to properly discount credit default swaps during the financial crisis. The SEC alleges that the bank had purchased billions of “in-the-money” swaps but failed to properly discount their value as markets deteriorated and credit support as a percentage of notional amount decreased. The SEC asserts that the firm failed to measure the fair value of the swaps in accordance with applicable accounting principles. The SEC further accuses the firm of failing to implement adequate internal controls which would have included a consistent valuation methodology that included market inputs, the participation of risk control, and documentation of valuation decisions.
OUR TAKE: The SEC applies similar fair valuation scrutiny in the asset management industry, requiring the documentation of observable market inputs. Firms should also ensure adequate contemporaneous documentation so that the regulators (or litigants) cannot second-guess their real-time, subjective decisions many months/years later.