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.
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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.