The Securities and Exchange Commission (“SEC”) recently charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in the hedge fund portfolios they managed.
The SEC investigation found that AlphaBridge Capital Management told investors and its auditors that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities. Instead, AlphaBridge gave internally-derived valuations to broker-dealer representatives to pass off as their own. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge. AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million to settle the charges.
“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.” To read the full press release click here.
This is a good reminder that advisors should document sources when showing performance, whether it be readily available data regarding market indexes, listed securities or more illiquid offerings. For advisors creating their own portfolios and valuations this illustrates the importance of utilizing data from resources that have a reputation of being reliable and remaining fair and balanced in portfolio valuation. Red Oak Compliance Solutions is here to help you through the process.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.