On October 17, 2012, the SEC charged a hedge fund advisory firm and two of its executives with fraudulently reporting false and inflated values for certain assets under management in order to conceal losses and collect higher fees from investors. In its complaint, the SEC alleges that Yorkville Advisors LLC (“Yorkville”), Mark Angelo, Yorkville’s founder and president, and Edward Schinik, Yorkville’s chief financial officer, used these inflated investment returns to collect excessive fees from Yorkville’s funds (the “Funds”), to solicit investors to make additional investments in the Funds and to entice investors who wanted to redeem their investments in the Funds to instead participate in a special redemption fund.
According to the SEC, in connection with this scheme, the defendants created and provided false and misleading documents to, and withheld adverse information about the Funds’ investments from, its auditors. In addition, the SEC’s complaint asserts that the defendants made “materially false and misleading statements to [Yorkville’s] investors and potential investors about: (1) the value of certain investments in the Funds; (2) [Yorkville’s] valuation policies generally; (3) the collateral underlying the investments; (4) the liquidity of the Funds, and (5) Yorkville’s use of third-party valuation consultants.” The SEC also claims that the defendants portrayed Yorkville as employing “robust” valuation procedures when, in fact, the methodologies used to value the Funds’ investments did not comport with Yorkville’s valuation policies. According to the SEC, as a result of these fraudulent statements, Yorkville was able to solicit over $280 million in investments from pension funds and funds of funds and received at least $10 million in excess fees based on the inflated value of Yorkville’s assets under management. The SEC’s complaint charges the defendants with violating various sections of the Securities Act, the Exchange Act and the Advisers Act.
According to the SEC’s press release, this is the seventh case arising from the SEC’s Aberrational Performance Inquiry, an initiative by the SEC Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns (for example, if a fund’s performance is inconsistent with its investment strategy or other benchmarks). In discussing this initiative, Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit, said “[t]he analytics put Yorkville front and center on our radar screen.”