February 2012 SEC Targets Alleged Pricing Violations Inside this issue: SEC Targets Alleged Pricing The Securities and Exchange Commission’s (“SEC”) Enforcement Division Violations ................................... 1 made headlines this January by targeting, in two separate actions, pricing violations in mutual fund portfolios that occurred in 2008. SEC Continues Crackdown against Insider Trading .............. 2 In the first instance, the SEC fined and censured UBS Global Asset Management (“UBSGAM”) for allegedly not following established fair valuation SEC Enforcement Chief Makes Statement on Citigroup Case..... 2 procedures in pricing certain illiquid fixed-income securities in the portfolios of three UBSGAM mutual funds. The SEC alleged as follows. The funds’ Chairman Schapiro Outlines Boards of Directors had established valuation methodologies and delegated SEC’s Corporate Governance implementation of those methodologies to UBSGAM, who in turn appointed its Regulation Agenda; Evaluates Global Valuation Committee (“Committee”) to carry out the valuation Recent Rulemaking ................... 3 responsibilities pursuant to certain pricing hierarchies. Under the procedures, the Possible Changes from the Public Boards of Directors reviewed the Committee’s valuations and ratified or adjusted Company Accounting Oversight them. Among other things, the procedures provided that if the difference Board......................................... 4 between the purchase price and the valuation from a third party pricing Money Market Funds source was 3% or more: (i) the purchase price was to be used for a maximum of five business days; (ii) UBSGAM was to issue a “price challenge” Money Market Fund requesting justification from the third party pricing source for the price quoted, Regulation under the and, if justified by the response, UBSGAM could use the pricing source price; Dodd-Frank Act .................. 5 and (iii) the Committee was to make a fair valuation determination if no Future Regulation Uncertain resolution was reached by the end of five business days. for Money Market Funds..... 6 According to the SEC order, 48 of 54 purchases of non-agency mortgage- backed securities in 2008 were valued upon purchase at prices substantially higher than the purchase prices – at least 100% higher in a majority of the cases, and in some cases 1,000% higher – using valuations provided by K&L Gates includes lawyers practicing broker-dealers or third party pricing services. The SEC alleged that the out of more than 40 fully integrated valuations provided by these pricing sources in some cases were stale and did offices located in North America, Europe, Asia, South America and the Middle not seem to take into consideration the prices at which the funds had East, and represents numerous purchased the securities. The SEC further asserted that UBSGAM did not fair GLOBAL 500, FORTUNE 100, and value the securities until the Committee met more than two weeks after it started FTSE 100 corporations, in addition to receiving “price tolerance reports” triggering the procedure for greater than 3% growth and middle market companies, discrepancies between the purchase prices and the prices provided by the third entrepreneurs, capital market party pricing sources. Thus, according to the SEC, the procedures were not participants and public sector entities. followed in that: (i) the securities were not valued at their purchase price, For more information, visit www.klgates.com. (ii) no price challenges were issued to the third party pricing sources for a majority of the securities on the “price tolerance reports” and, when only a handful of responses were received, there was no follow up , and (iii) no fair value determinations were made within the five business day deadline . Once the Committee did meet and fair valued the securities, they decided to fair value the securities at the midpoint between the purchase price and the pricing source quote pending receipt of responses to price challenges, which was later ratified by the Boards of Directors.
Department’s continuing investigations into As a result of these actions, according to the SEC, the NAVs of the funds were misstated between insider trading in the wake of the high-profile one cent and 10 cents per share for several case against the Galleon Group and its days in June 2008. UBSGAM settled the charges founder, Raj Rajaratnam. without admitting or denying the SEC’s findings, In the SEC’s Dell and Nvidia case, the SEC and agreed to be censured and to pay a $300,000 alleges that the traders and analysts, each of penalty. UBSGAM also consented to a cease- whom worked for either Diamondback Capital and-desist order from committing or causing the Management LLC or Level Global Investors LP: same violations in the future. obtained information from insiders at Dell, In the second proceeding, the SEC’s Enforcement regarding Dell’s quarterly earnings Division alleged that the NAV of the Evergreen performance, and at Nvidia, regarding Ultra Short Opportunities Fund was materially revenue figures and gross profit margins, in overstated from at least March 2008 to early June each case in advance of the issuer’s 2008 due to the conduct of Lisa B. Premo, at the quarterly earnings announcements, time the Fund’s lead portfolio manager and CIO of liquidity and structured solutions for illegally tipped portfolio managers at their Evergreen Investment Management Co. firms, which traded on the information, and (“Evergreen”). Specifically, the SEC alleged benefited their firms with ill-gotten gains in that Premo failed to convey to either the excess of $62.3 million on the basis of inside Fund’s board or Evergreen’s valuation information about Dell and $15.3 million on committee certain material information she the basis of information about Nvidia. possessed concerning the value of a collateralized debt obligation owned by the The SEC has charged each of the defendants with Fund that had experienced an event of default. violations of the federal anti-fraud provisions of Thus, the SEC asserts that Premo defrauded the Section 17(a) of the Securities Act of 1933 and Fund and breached her fiduciary duty to the Section 10(b) and Rule 10b-5 of the Securities Fund as its portfolio manager. A hearing will Exchange Act of 1934 (“the Exchange Act”) and be scheduled to consider the allegations. has charged each of the individual defendants with aiding and abetting others’ violations of the These two proceedings demonstrate the Exchange Act. The SEC is seeking a judgment Enforcement Division’s heightened scrutiny of ordering the defendants to disgorge all of their mutual fund portfolio valuation and its focus on illicit gains, with interest and penalties, and valuation practices during the height of the permanently enjoining them from future financial crisis in 2008. violations of these provisions. SEC Continues Crackdown SEC Enforcement Chief against Insider Trading Makes Statement on Citigroup Case In a move that signals the SEC is still on the offensive against alleged insider trading, on January 18th the SEC charged seven individual The SEC recently found itself on the defensive hedge fund traders and analysts, and their regarding its established practice of settling respective firms, for allegedly making $78 million enforcement actions without requiring the from trades based on nonpublic information about subject of the action to admit or deny Dell, Inc. (“Dell”) and the Nvidia Corporation wrongdoing. In a high-profile decision, in (“Nvidia”). The U.S. Attorney for the Southern November 2011, Judge Rakoff of the U.S. District of New York has also brought criminal District Court for the Southern District of New charges against the individual defendants. These York refused to accept a $285 million proposed claims stem from the SEC’s and the Justice SEC settlement with Citigroup over the sale of 2 February 2012
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