Doug Cornelius on compliance for private equity real estate
After a hiatus for the heat of the summer, here is a compliance case of valuation malfeasance. It comes from the biggest collapse of a private equity fund manager. The Abraaj Group and its CEO, Arif Naqvi, were vanguards in emerging markets investments. After some early success buying and transforming Inchcape Shipping Services and Jordanian … Read more »
An SEC investigation found that Colorado-based investment adviser Deer Park Road , in connection with one of its funds, failed to have policies and procedures to address the risk that its traders were undervaluing securities and selling for a profit when needed. The SEC fined a hedge fund $5 Million, and its Chief Investment Officer … Read more »
Back in 2012, the Securities and Exchange Commission filed suit against Yorkville Advisors for valuation failures. According to the SEC complaint, the failure was two-pronged: one of misstatements and a second failure to follow the funds’ own policies and procedures on valuation. Yorkville denied the charges. Legal action has continued and Yorkville has been largely … Read more »
Private funds are often dealing hard-to-value assets. Real estate funds are overwhelmingly dealing with hard-to-value assets. For purposes of GAAP reporting those will be the Level 2 and Level 3 assets. For these assets, valuations can be manipulated if you have a wiling participant in the process. For thinly-traded securities, like some bonds, private funds … Read more »
The Securities and Exchange Commission regulations for investment advisers does not contain any specific requirements on how valuations should be conducted. That means operating under the general anti-fraud provisions. That is, valuations should not be misleading, deceptive or fraudulent. Although there are no specific regulations, there are enforcement actions from the SEC against advisers that … Read more »
Real estate is the standard for hard to value assets. But there are plenty of models to help reach a reasonable value. The Securities and Exchange Commission has apparently taken the position that it will not challenge absolute valuations, but will challenge flaws in the models that get to the value. A recent SEC case … Read more »
The Securities and Exchange Commission brought another case out of its Aberrational Performance Inquiry initiative in the Enforcement Division’s Asset Management Unit. That initiative identifies funds with suspicious returns and flags performance that is inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny. The initiative nabbed GLG … Read more »