A Steamboat Springs, Colo., private hedge fund management firm has agreed to pay $5 million to settle charges that it failed to properly value its funds, the Securities and Exchange Commission announced Tuesday.
The fund’s chief investment officer, Scott Burg of Steamboat Springs, agreed to pay a $250,000 penalty for his part in the operation. The fund, Deer Park Road Management Company, and Burg did not admit or deny guilt in reaching the settlement with the SEC.
Prior to this, Deer Park had been known as “one of the top and most consistent performing hedge funds in the country,” according to the SEC order. Deer Park specializes in mortgage-backed securities and manages $2.5 billion in assets. The flagship fund it manages is SST Partners.
According to the SEC, Deer Park failed to have policies in place to address the risk that its traders were undervaluing securities and selling for a profit when needed. The firm also failed to guard against its traders’ providing inaccurate information to a pricing vendor and then using the prices it got back to value bonds.
Burg oversaw the valuation of certain assets in the flagship fund and approved valuations that the traders flagged as “undervalued” with notations to “mark up gradually,” rather than at market price, the SEC order said. Deer Park’s risk management committee consisted of relatives of the principles of the firm who had no relevant expertise in judging values.
“Valuation of client assets is a critically important area for investment advisers,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Deer Park’s pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow.”