The SEC has charged a New Jersey-based hedge fund, Yorkville Advisors LLC, and officers with fraudulently overvaluing illiquid investments in order to attract investors to their hedge fund. Attracting more investors increases hedge fund fees, which are based on a percentage of the amount of money the fund manages. The charges are part of a larger SEC crackdown on hedge funds stemming from its “aberrational performance inquiry” ? i.e., investigating “too-good-to-be-true” investment performance claims.
The SEC alleged that the defendants “grossly” exaggerated investment valuations and “deliberately” ignored “obvious decreases” in the value of their investments. Yorkville CEO Mark Angelo and CFO Edward Schinik allegedly “enticed more than $280 million” from pension funds and funds of funds by fraudulently making Yorkville look more attractive to investors, thereby generating at least $10 million in ill-gotten fees (“SEC Snares Fund Firm in Data Dragnet,” Wall Street Journal).
During the 2008 financial crisis, Yorkville typically invested in small, troubled companies by making loans in return for debt securities that were convertible to common stock. A case in point was Yorkville’s holdings of Wentworth Energy Inc. convertible bonds.
The SEC alleged that Yorkville valued its Wentworth investment at $12.5 million in 2009, and that the valuation was at least $10 million too high. Yorkville’s purported justification was that it planned to convert the bonds to shares of common stock and sell them. But Wentworth had missed three interest payments, and given the tiny trading volume of Wentworth shares, Yorkville would have needed more than 65 years to sell the shares, according to the SEC.
The SEC further alleged that Yorkville had hired a valuation firm, Pluris Valuation Advisors LLC, but “decided to ignore” its valuations because they were too low. Then Yorkville allegedly lied to its auditors, telling them that Pluris had valued Yorkville’s portfolio at $4.9 million more than the firm’s own calculations, when in fact Pluris had valued it $21 million less than Yorkville’s own calculations.
Interestingly, Yorkville is reportedly arguing that two former SEC enforcement lawyers were members of Yorkville’s valuation committee, and that neither of them “took exception to the valuations at issue.”
Page Perry, LLC is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.