Fund Administrator Fined for Role in Valuations Fraud

A fund administrator settled SEC charges for failing to identify "red flags" of fraudulent behavior on the part of a hedge fund client.

In its Order, the SEC stated that the fund had experienced "significant losses" resulting from improper trading conducted by advisers of the fund. The SEC found that the advisers were engaged in a scheme to defraud the fund and investments by "misappropriating and misusing investor funds." According to the SEC, rather than accounting for the losses, the administrator, who was responsible for calculating the fund’s monthly net asset value ("NAV"), disseminated misleading account statements at the direction of the advisers to offset the effect of the fund’s losses and prevent a decrease in the fund’s NAV.

According to the SEC, the misleading statements materially overstated the value of the investors’ investments, causing some to increase their investments with the fund.

As a result, the SEC found that the fund administrator violated (i) Advisers Act Section 206(4) ("Prohibited transactions by investment advisers") and Rule 206(4)-8(a)(1) ("Pooled investment vehicles") thereunder and (ii) Securities Act Sections 17(a)(2) and 17(a)(3) ("Fraudulent Interstate Transactions")

To settle the charges, the fund administrator agreed to (i) cease and desist from further rules violations and (ii) pay $18,000 in disgorgement plus prejudgment interest of $4,271 and $100,000 in civil penalties.