The Securities Exchange Commission followed up on whistleblowers’ complaints against TCA Fund Management for inflating the value of the assets in its Global Credit Master Fund. In January, investor redemption requests exceeded the liquidity of the fund and it eased operations.
The SEC complaint against TCA Global alleges that TCA was booking fees before they were received.
The SEC claims that TCA was booking loan fees as revenue at the non-binding term sheet stage, instead of when the loan closed. The SEC also claimed that the TCA was booking investment banking fees at the time the firm was engaged and not when the fee was earned . TCA would only be paid if a transaction closed. According to the SEC complaint these practices resulted in over $155 in improperly recognized revenue.
As for the value of the TCA assets, the SEC called it “grim.”
“For 2017 and 2018, the Funds’ auditor issued a qualified opinion with respect to Master Fund’s income and assets, including, for 2018, a qualified opinion with respect to 89% of Master Fund’s NAV. By May 2019, Master Fund had only 5% of its assets in cash, with most of the balance of the assets consisting of amounts owed to Master Fund on loans to thinly capitalized borrowers, a substantial amount of which are in default.”
Strangely, however, the SEC complaint does not accuse TCA of overstating its assets. The whistleblowers accuse the firm of not writing down asset value. I’m not sure why the SEC pulled its punch on the valuation issue.
The other issue that the SEC did not highlight in its complaint is that TCA would likely have been receiving excessive fees from the fund based on the inflated values. I assume the fee had some basis on NAV. With the NAV inflated, the fees would have been inflated.
According to the NBC News story, the problems first surfaced in a 2016 SEC exam. TCA had restated some values as a result of the process. The whistleblowers stepped up when they felt the SEC has missed the full extent of the fund’s misconduct.
Of course, we haven’t heard TCA’s side of the story. I’m just looking at this as a compliance lesson.
Valuation should be the number one issue for compliance in funds with illiquid assets. They are harder to value so more effort should be put into making sure the values can be justified.
Sources:
- SEC Charges Florida Investment Adviser with Fraud
- SEC complaint against TCA Global
- Whistleblowers say Florida investment firm has inflated value, earnings of its main fund
- First Class Action Lawsuit on Behalf of TCA Fund Investors Accuses Management Group of Scheme to Falsify Net Asset Value
- SEC probes Florida private lender over accounting questions
- TCA Form ADV Part 2
- TCA Fund Management Group Liquidating Main Investment Fund Amid SEC Probe & Whistleblower Complaint