Gavel

SEC charges London-based hedge fund adviser and US holding company over internal control failures

Fri, 13/12/2013 - 12:02

The US Securities and Exchange Commission (SEC) has charged a London-based hedge fund adviser GLG Partners and its former US-based holding company with internal controls failures.

The failures led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.
 
GLG Partners LP and GLG Parters Inc have agreed to pay nearly USD9m to settle the SEC’s charges.
 
“Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated,” says Antonia Chion, an associate director in the SEC’s division of enforcement.  “GLG’s pricing committee did not have the information and time it needed to properly value assets.”
 
According to the SEC’s order instituting settled administrative proceedings, the GLG firms managed the GLG Emerging Markets Special Assets 1 Fund.  From November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25 per cent private equity stake in an emerging market coal mining company.  The overvaluation resulted in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.
 
According to the SEC’s order, GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee.  On a number of occasions, GLG employees received information calling into question the USD425m valuation for the coal company position.  But there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all.  There was confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.   
 
The SEC’s order finds that GLG Partners LP violated and GLG Partners Inc. caused violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13.  The order requires the firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.  The order directs the firms to cease and desist from violating or causing violations of various provisions of the federal securities laws. 
 
The firms consented to the order without admitting or denying the charges.  The SEC is establishing a Fair Fund to distribute money to harmed fund investors.  The GLG firms agreed to pay disgorgement of USD7,766,667, prejudgment interest of USD437,679, and penalties totalling USD750,000. 


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