Chief Operating Officer Misled Fund Administrator with Inflated Valuations
The SEC fined and barred the Chief Operating Officer of a private equity fund for providing non-conforming asset valuation information to the third party fund administrator, thereby resulting in inflated net asset values and performance. The SEC asserts that the COO knowingly included loan transactions that had not yet progressed past the term sheet and removed other similar transactions in order to smooth performance and inflate the NAV. Using the term sheet only transactions violated the IFRS accounting standards advertised in the PPM. The SEC charges the COO with aiding and abetting his employer’s securities fraud violations.
The SEC will hold C-suite executives accountable for wrongdoing. They cannot simply pass along misleading information without regard for the downstream consequences. Also, investors must understand that a fund’s NAV relies mostly on the inputs provided by management, even if the fund has retained a third party administrator. The best check on process is a robust and independent compliance function.