A Denver-based alternative fund manager agreed Monday to refund investors $5.4 million after the Securities and Exchange Commission charged the firm with levying excessive management fees and misleading investors about how it valued certain assets.
Equinox Fund Management LLC calculated management fees “contrary to the method described in registration statements for a managed futures fund called The Frontier Fund (TFF), and the firm also deviated from its disclosed valuation methodology for some TFF holdings,” according to the SEC.
The excessive management fees were collected by Equinox during a seven-year period. The firm must also pay $600,000 in prejudgment interest and a $400,000 penalty.
“Fund managers can’t tell investors one thing and do another when assessing fees and valuing assets,” said Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Equinox’s misleading disclosures gave investors a distorted picture of how the firm determined compensation and valued significant fund holdings.”
According to the SEC’s order instituting a settled administrative proceeding, while TFF’s registration statements disclosed that Equinox charged management fees based upon the net asset value of each series, Equinox actually used the notional trading value of the assets, which is the total amount invested including leverage. Equinox consequently overcharged the fund $5.4 million in fees from 2004 to 2011.
TFF’s Form 10-K for 2010 and Forms 10-Q for the first and second quarters of 2011 disclosed that its methodology of valuing certain derivatives was “corroborated by weekly counterparty settlement values.” In fact, the SEC says, “Equinox received information during that timeframe showing that its valuation of certain options was substantially higher than the counterparty’s valuations.”
TFF’s Form 10-Q for the third quarter of 2011 disclosed that an option had been transferred between two series consistent with TFF’s valuation policies. But it was actually transferred using a different valuation methodology than substantially identical options held by other TFF series.
TFF’s Form 10-Q for the second quarter of 2011 failed to disclose as a material subsequent event the series’ early termination of an option that constituted its largest investment at a materially lower valuation than had been recorded for that option.
The SEC’s investigation is continuing.
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