The SEC continues to bring enforcement actions against advisers of hedge funds for, among other things, overvaluing hedge fund assets and providing false performance reports to current and prospective investors. Another example of the SEC’s concentrated efforts to go after such advisers is the recent announcement by the SEC of the commencement of enforcement actions against New Jersey-based Yorkville Advisors LLC, and its president and chief financial officer (SEC v. Angelo, S.D.N.Y., 12-Civ.-7728, 10/17/12). The parties are charged by the SEC with misrepresenting the safety and liquidity of the assets held by the funds they managed and, because the funds’ asset values were inflated, charging investors excessive management fees.
Interestingly, the charges in this matter are a result of the SEC’s application of the so-called Aberrational Performance Inquiry or API. According to the SEC, its Asset Management Unit uses analytical data to help identify “suspicious returns” within a fund’s report performance. According to the SEC, six other cases have been opened based on the results from the API analysis. Based on the reported performance results of the Yorkville funds, the API analysis determined that there was reason to doubt the performance numbers.
More specifically, the SEC alleges that the adviser and its principals failed to follow its own stated valuation practices for the funds’ assets, withheld adverse information from the funds’ auditor, and misled investors about the liquidity of the funds, related collateral, and third-party valuation firms supposedly engaged by the adviser. According to the SEC calculations, the parties collected more than $280 million from pension fund investors in their funds, which allowed the adviser to charge at least $10 million in excessive fees.
The defendants are charged with violations of the anti-fraud provisions under various federal securities laws as well as under the Investment Advisers Act of 1940.