The Securities and Exchange Commission has charged a former USD1bn hedge fund advisory firm and two executives with scheming to overvalue assets under management and exaggerate the reported returns of hedge funds they managed in order to hide losses and increase the fees collected from investors.
The SEC alleges that New Jersey-based Yorkville Advisors, founder and president Mark Angelo, and chief financial officer Edward Schinik enticed pension funds and other investors to invest in their hedge funds by falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure. They misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.
This is the seventh case arising from the SEC’s Aberrational Performance Inquiry, an initiative by the enforcement division’s asset management unit that uses proprietary risk analytics to identify hedge funds with suspicious returns. Performance that is flagged as inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny.
“The analytics put Yorkville front and centre on our radar screen,” says Bruce Karpati, chief of the SEC enforcement division’s asset management unit. “When we looked further we found lies to investors and the firm’s auditors as well as a scheme to inflate fees by grossly overvaluing fund assets. We will continue to pursue hedge fund managers whose success is based on fiction rather than fact.”
According to the SEC’s complaint filed in US District Court for the Southern District of New York, Yorkville, Angelo and Schinik defrauded investors in the YA Global Investments (US) and YA Offshore Global Investments hedge funds.
The SEC alleges that Yorkville and the two executives:
• Failed to adhere to Yorkville’s stated valuation policies.
• Ignored negative information about certain investments by the funds.
• Withheld adverse information about fund investments from Yorkville’s auditor, which enabled Yorkville to carry some of its largest investments at inflated values.
• Misled investors about the liquidity of the funds, collateral underlying the investments, and Yorkville’s use of a third-party valuation firm.
The SEC alleges that by fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik enticed more than USD280m in investments from pension funds and funds of funds. This enabled Yorkville to charge the funds at least USD10m in excess fees based on the inflated values of Yorkville’s assets under management.