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Vedder Thinking | Articles SEC Charges Investment Adviser's Former CIO and Founder in Connection with Fraudulently Overvaluing Assets


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On February 17, 2022, the SEC filed a complaint in the U.S. District Court for the Southern District of New York alleging that the former chief investment officer and founder of an SEC-registered investment adviser engaged in a fraudulent scheme to overvalue assets held by a mutual fund and a private fund managed by the adviser by more than $1 billion in an effort to artificially inflate the advisory fees paid by the funds and, as a result, his own personal income. The SEC alleged that from at least 2017 through February 2021, the defendant knowingly inflated the funds’ stated valuations in at least four ways: by manipulating computer code use by a third-party pricing service’s valuation models; by providing inputs to the pricing service’s models that the defendant knew did not match the term sheets for the funds’ positions; by selecting valuation models that the defendant knew would not properly value the funds’ relevant positions; and by knowingly cherry-picking a key valuation input. The SEC alleged that in March 2020, when faced with market volatility in response to the COVID-19 pandemic, the defendant stepped up the manipulation of the funds’ valuations, which attracted hundreds of millions of dollars in additional investments and forestalled investor redemptions, all while some funds with similar investment strategies struggled or failed.

The SEC alleged that the defendant tried to conceal the valuation scheme by sending forged term sheets to the funds’ independent auditor, providing the SEC with backdated minutes of valuation meetings that never occurred and altering compliance manuals and private placement memoranda. The SEC alleged that by September 2020, the fraudulent scheme had overvalued the funds by more than $1 billion, and that at times the mutual fund was more than 65 percent overvalued. The SEC alleged that as a result of the funds’ overvaluation, the defendant received more than $26 million in profit distributions.

The SEC charged the defendant with violating antifraud and other provisions of the federal securities laws and is seeking permanent injunctive relief, return of allegedly ill-gotten gains and civil penalties. The SEC also is seeking to permanently bar the defendant from serving as a public company officer or director.

In conjunction with this action by the SEC, on February 17, 2022, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against the defendant, and the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action against the defendant related to the alleged overvaluation scheme.

The complaint can be found here. The SEC’s press release announcing the charges is available here.


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