Mutual funds are required to use a standard methodology to calculate their performance. But there’s no such requirement for hedge funds. That’s because hedge funds frequently invest in illiquid or otherwise difficult-to-value securities. However, that doesn’t mean hedge funds have a green light to misreport their valuations or prices. They still must be accurate and truthful.
For example, advisers should identify the fund’s net asset value (NAV): It should be clear if the fund’s performance data reflects the fund’s cash and the assets or if the numbers are the manager’s estimate of changes in value. The performance data should also state if it includes any deductions for expenses or fees.
If the fund managers fail to report their valuations or prices accurately—if they falsify accounting or billing statements or create misleading marketing documentation—that may be a violation of the Securities Act, SEC Rule 10b-5, and the Advisers Act.
In September 2022, that’s what happened. The Securities and Exchange Commission (SEC) obtained judgments against an investment adviser and its CEO for inflating the performance value of the funds. According to the SEC, the defendants used inflated broker quotes and “imputed” mid-point valuations to increase the value of the funds’ holdings while hiding the funds’ poor performance.
The adviser’s CEO pled guilty to a securities fraud violation and agreed to pay a $450,000 fine. The SEC also permanently barred the CEO from associating with any adviser, broker, dealer, or agent. And the investment adviser is permanently enjoined from further violation of the Investment Advisers Act.
Even if the wrongdoing doesn’t rise to the level of outright fraud, advisers can run afoul of the law because they owe a fiduciary duty to the funds. And, even though hedge fund managers may have more leeway to conduct riskier investments, they can still be held accountable if they breach that duty.
If you’re concerned that an adviser or the hedge fund is misrepresenting the fund’s valuations or prices, consider becoming an SEC whistleblower. If you bring the SEC a tip that leads to a successful resolution, you may be eligible for an award.
We have years of experience representing SEC whistleblowers, coupled with an SEC Enforcement lawyer on our team and an in-depth understanding of how the SEC Whistleblower Program operates. We are here to assist whistleblowers attempt to maximize their opportunity to receive a financial bounty. For a free, confidential consultation, email us or call us today at (800) 975-4345.