Evergreen Investment Management Company, LLC and an affiliated broker-dealer were charged by the SEC in an enforcement action with violating numerous provisions of the securities laws by overstating the “fair value” of mortgage-backed securities held by its mutual fund, the Ultra Short Opportunities Fund. The SEC found that the value of the Fund was overstated by as much as 17% in 2007 and 2008 due to Evergreen’s improper valuation practices which included failing to take into account readily available information on the assets of the Fund and withholding negative information from the committee responsible for valuing the assets. According to the SEC, Evergreen committed fraud under Section 206(2) of the Advisers Act by charging advisory fees based on an overstated NAV and violated Rule 22c-1(a) under the Investment Company Act by selling and redeeming shares at prices not based on NAV.
The SEC also found that once the valuation problems were discovered and the holdings were being re-priced, Evergreen disclosed material, nonpublic information on the problems to only select shareholders of the Fund, which would have enabled them to cash out of the Fund before additional re-pricing of the shares caused the value to further decrease. Evergreen also allegedly violated provisions of the Advisers Act and the Exchange Act by failing to have written policies and procedures reasonably designed to prevent such misuse of material, nonpublic information. Additionally, the SEC found that Evergreen engaged in prohibited cross-trades by causing other Evergreen funds to purchase securities from the Fund.
Without admitting or denying the SEC’s findings, Evergreen agreed to pay more than $40 million in compensation to shareholders, penalties and disgorgement of ill-gotten gains in order to settle the case, as well as a related enforcement action by the Massachusetts Securities Division.