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Regulation and Compliance > Federal Regulation > SEC

SEC Enforcement: AlphaBridge Capital, Deloitte & Touche Charged

By Marlene Y. Satter

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Among recent actions by the SEC were charges against a hedge fund advisory firm and its two owners for a fraudulent fund valuation scheme; charges against Deloitte & Touche for violating auditor independence rules; and Goldman Sachs was fined with violating the market access rule.

Fraudulent Fund Valuation Scheme Gets Hedge Fund Firm Charged

Greenwich, Connecticut-based AlphaBridge Capital Management and its two owners, Thomas Kutzen and Michael Carino, have been charged by the SEC with fraudulently inflating the prices of securities in hedge fund portfolios they managed.

According to the agency, AlphaBridge told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly traded residential mortgage-backed securities. But instead, AlphaBridge internally generated its own valuations, which it then provided to broker-dealer representatives to pass off as their own. Thanks to these inflated asset valuations, the funds paid higher management and performance fees to AlphaBridge.

The SEC separately charged Richard Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative. Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge. Evans neither admitted nor denied the findings.

AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices. Carino actually developed the data himself.

AlphaBridge, Kutzen and Carino have agreed to settle the SEC’s charges without admitting or denying the findings, and will pay a total of $5 million. AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years. AlphaBridge will return more than $4 million in disgorgement and nearly $1 million in penalties to compensate for the funds’ overpayment of management and performance fees, and the firm will then close down the funds.

SEC Charges Deloitte & Touche with Auditor Independence Rule Violations

The SEC has charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited.

The SEC also charged the trustee, Andrew Boynton, with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations.

According to the agency, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton, who served on the boards and audit committees of the three funds.

In 2006, Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton ,and collaborated with him to implement it and serve both internal and external firm clients through 2011.

While, as a member of the three funds’ boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires that were intended in part to identify conflicts of interest, he failed to identify his business relationship with Deloitte Consulting in response to a question calling for identification of his “principal occupation(s) and other positions.”

Relying on his understanding that Deloitte Consulting was a separate legal entity from Deloitte, Boynton also did not identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any “direct or material indirect business relationship” with Deloitte.

Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work. Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees.

Deloitte said in a statement: ““As outlined in the July 1 SEC order, we self-identified an independence matter as a result of enhanced independence measures that we put in place. We self-reported this matter to the SEC in March 2012. As an organization committed to safeguarding the capital markets, we strive for continuous improvement. We are pleased to resolve this matter and are confident that our enhanced policies, training and monitoring will maintain ongoing compliance.”

ALPS, for its part, contractually agreed to assist the funds in discharging their responsibilities, but it failed to adopt required written policies and procedures that were sufficient to prevent auditor independence violations. The funds’ audit committee charter addressed auditor independence generally, but the T&O questionnaires did not expressly cover business relationships with the auditor’s affiliates. The funds also did not have sufficient written policies and procedures to prevent other types of auditor independence violations, nor did they provide sufficient training to assist board members in the discharge of their responsibilities related to auditor independence.

All parties have agreed to settle the charges without admitting or denying the SEC’s findings. Deloitte will pay disgorgement of audit fees in the amount of $497,438 plus prejudgment interest of $116,478 and a penalty of $500,000. Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000. ALPS agreed to pay a $45,000 penalty.

A spokesman for Deloitte said the firm had self-reported the issue to the SEC in March 2012. “We are pleased to resolve this matter and are confident that our enhanced policies, training and monitoring will maintain ongoing compliance,” he added.

Goldman Sachs Hit with $7 Million SEC Penalty

The SEC charged Goldman Sachs with violating the market access rule in connection with a trading incident that resulted in erroneous executions of options contracts.

According to the agency, lack of adequate safeguards caused Goldman Sachs to send, in less than an hour, about 16,000 mispriced options orders to various options exchanges on August 20, 2013.

The orders were sent after the firm implemented new electronic trading functionality that was designed to match internal options orders with client orders. However, a software configuration error ended up converting the firm’s “contingent orders” for various options series into live orders, and assigned them all a price of $1.

These orders were then sent to the options exchanges during premarket trading, and within minutes after regular market trading opened, approximately 1.5 million options contracts were executed. Later, many of the executed trades were canceled or received price adjustments pursuant to the options exchanges’ rules on clearly erroneous trades.

The agency also said that Goldman Sachs failed to have safeguards to prevent it from executing orders that would cause it to exceed its capital threshold.

Among the problems identified by the agency were unreasonably wide price checks for options orders during premarket hours; an instance in which an employee lifted several circuit breaker blocks that would have shut down outgoing options order messages if the rate exceeded a certain level; poor understanding of those circuit breaker blocks; and the lack of adequate precautionary steps in written policies governing the implementation of software changes.

Goldman Sachs has agreed to settle the charges without admitting or denying the agency’s findings, and will pay a penalty of $7 million.

– Read last week’s Enforcement News: SEC Enforcement: Oil CEO Charged With Bilking Investors via Spam Emails

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