Alert March 19, 2013

SEC Settles Administrative Proceeding Over Deviation from Valuation Policy Stated in Fund Offering Materials and Investor Reports for Registered Adviser’s Fund of Private Equity Funds

The SEC settled public administrative proceedings against a registered investment adviser and its wholly owned subsidiary, also a registered investment adviser, (together, the “Adviser”) over misrepresentations made to prospective and existing investors in a private equity fund of funds they managed (the “Fund”) regarding the manner in which the Fund’s largest asset (the “Underlying Fund”) was valued.  The SEC found that, in contravention of the Adviser’s compliance procedures and without disclosure to appropriate personnel at the Adviser or to Fund investors or prospects, the Fund’s portfolio manager (the “Portfolio Manager”) substituted a valuation method for the Underlying Asset that differed from the one described in Fund marketing materials and quarterly reports to investors; the Portfolio Manager’s implementation of the alternative valuation methodology materially increased Fund performance over what it would have been had the valuation methodology disclosed in Fund documentation been applied.

This article summarizes the SEC’s findings set forth in the settlement order (which the Adviser has neither admitted nor denied) and the sanctions imposed (including sanctions imposed as a result of a related proceeding by the Massachusetts’ Attorney General).

Undisclosed Change in Valuation Methodology for Fund Holding

On Thursday, October 22, 2009, the Adviser’s compliance personnel approved a pitch book for use in marketing the Fund which stated that the value of the Fund’s assets was “based on the underlying managers’ estimated values,” as had been the Fund’s valuation practice since its launch in April 2008.  Over the succeeding weekend, the Portfolio Manager and his team revised the marketing materials for the Fund, including the pitch book, to substitute a “par value” valuation for the Underlying Fund created by the Portfolio Manager for the valuation provided by the Underlying Fund’s manager.  The Adviser’s compliance department was not informed of the change in valuation methodology and the revised presentation bore the same code indicating compliance department approval as on October 22, 2009.  The Adviser did not verify that the valuations provided were the underlying managers’ estimated values.

The valuations for the Underlying Fund produced by the “par value” methodology were incorporated into performance summary tables in pitch books and quarterly reports to Fund investors from October 26, 2009 through June 2010.  Marketing efforts for the Fund during this period resulted in approximately $61 million in new investments.  The performance of the Fund and the Underlying Fund was touted to prospective investors without disclosing the use of the par value methodology in valuing the Underlying Fund.  Former employees of the Adviser made the following misrepresentations in connection with marketing the Fund: (i) the increase in the value of the Fund’s largest investment was due to an increase in performance (when, in fact, the increase was attributable to the Portfolio Manager’s use of the par value methodology), (ii) a third party valuation firm used by the Underlying Fund’s manager wrote up the value of the Underlying Fund (which was not true), and (iii) the Fund’s underlying funds were audited by independent, third party auditors (when, in fact, the Underlying Fund was not audited).

The SEC found that, because the Underlying Fund was the Fund’s largest holding, the increase in its value resulting from the use of the par value methodology materially improved the Fund’s return.  The SEC noted, for example, that for the quarter ended June 30, 2009, it increased the Fund’s IRR from approximately 3.8% to 38.3%.

Violations of Law

The SEC found that (1) the undisclosed change in valuation methodology described above caused the Fund’s marketing materials and investor reports during the relevant period to be materially misleading and (2) the Adviser’s written policies and procedures were not reasonably designed to ensure that valuations provided to prospective and existing investors were presented in a manner consistent with written representations regarding those valuations.  The SEC further determined that, as a result, the Adviser willfully violated:

  • Section 17(a)(2) of the Securities Act of 1933, which prohibits any person in the offer or sale of securities from obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;
  • Section 17(a)(3) of the Securities Act of 1933, which prohibits any person in the offer or sale of securities from engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser;
  • Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, which prohibits any fraudulent, deceptive, or manipulative act, practice, or course of business by an investment adviser to any investor or prospective investor in a pooled investment vehicle; and
  • Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, which requires, among other things, that registered investment advisers adopt and implement written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and its rules.


In addition to censure and a cease-and-desist order, the Adviser agreed to disgorge a total of $2,269,098 to investors who invested in the Fund between October 2009 through June 2010, an amount representing the management fees collected by the Adviser from these investors from October 2009 through June 2010, plus reasonable interest, and including amounts from a related proceeding by the Commonwealth of Massachusetts.  The Adviser also agreed to a civil money penalty of $617,579, an amount that the SEC noted could have been larger but for the Adviser’s cooperation in the SEC’s investigation and related enforcement action.  The Adviser agreed to engage an independent consultant to conduct a review of the adequacy of the Adviser’s valuation policies and procedures and make recommendations.  In addition, the Adviser agreed, by no later than the 10th day after the entry of the settlement order, to (a) post a hyperlink to the order on its website and keep the link active for 12 months, and (b) provide a copy of the order to each of its existing advisory clients.

Separately, the Adviser will pay a penalty of $132,421 to the Commonwealth of Massachusetts with respect to a related proceeding.

Oppenheimer Asset Management Inc. and Oppenheimer Alternative Investment Management, LLC, SEC Release No. 33-9390, IA-3566 (March 11, 2013).