Hedge Fund Firm Pays Over $10 Million for Allowing PMs to Use Sham Broker Quotes
A hedge fund firm agreed to pay over $10 Million in fines, disgorgement and interest for failing to stop two portfolio managers from using sham broker quotes in a scheme to inflate fund NAVs. The SEC faults the firm for failing to observe its own valuation procedures by allowing the PMs significant influence to override pricing services, failing to conduct adequate due diligence of the brokers, and neglecting to obtain at least 3 broker quotes for a price override. The SEC also fined and barred the firm’s CFO for failure to supervise by ignoring red flags such as the frequency that the PMs overrode prices and that overrides almost always resulted in higher valuations. The SEC previously charged the portfolio managers.
OUR TAKE: Investment firms and supervisors cannot turn a blind eye to questionable valuations and performance. According to the SEC, the respondent collected over $3 Million in unearned performance and management fees, making the firm ultimately responsible for its employees’ wrongdoing.