One of the primary target areas for examination by the SEC’s Enforcement Division Asset Management Unit is the valuation of hedge fund assets by its managers. In a recent enforcement case, the SEC took action, including an industry bar, against one of two owners of an investment advisory firm, the hedge fund manager, for fraudulently inflating the prices of securities in the portfolio of the hedge funds they manage.
Alpha Bridge Capital Management, a registered investment adviser based in Connecticut, and its two individual owners agreed in a settled matter with the SEC to a censure and one of the owners agreed to be barred from the securities industry for at least three years. In addition, the advisory firm agreed to the disgorgement of more than $4 million, the payment of about $1 million in penalties, and to close down the funds.
The fraud, according to the SEC allegations, occurred when the hedge fund manager told the fund’s investors and auditor that it had obtained independent price quotes for certain thinly traded securities when instead they used prices derived internally. The higher prices used resulted in the manager receiving greater fees based on a percentage of fund assets and performance.
The SEC found that the advisory firm and its two owners violated the anti-fraud provisions of the Investment Advisers Act of 1940.