SEC Charges Fund Manager with Manipulating Inputs to Ensure Inflated Valuations
The SEC has commenced enforcement proceedings against a fund manager that it alleges used inflated valuations to ensure that the fund achieved a threshold return that allowed the respondent to withdraw cash. Although the fund manager used a third party valuation agent, the SEC alleges that the respondent manipulated all relevant input data to ensure inflated valuations. The SEC further argues that only the respondents had the expertise with respect to the underlying assets to know that the input data was faulty. The SEC also charges the respondents with materially misleading investors about the fund’s assets, diversification, and risk.
OUR TAKE: Hiring a third party will not insulate unlawful acts from liability if you can control the third party or manipulate the outputs. Investors should also understand that a third party valuation agent, administrator, or auditor does not necessarily mean that a firm is transparent.