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Hedge Fund Adviser and Holding Company Agree to Pay Nearly $9 Million in SEC Settlement for Overvaluing Fund Assets

GLG Partners, L.P., a London-based hedge fund adviser that managed GLG Emerging Markets Special Assets 1 Fund, and its former U.S.-based holding company, GLG Partners, Inc., were charged with internal control failures that led to the overvaluation of the fund’s assets and inflated fee revenues for the GLG firms. “Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement. “GLG’s pricing committee did not have the information and time it needed to properly value assets.”

According to the SEC’s order instituting settled administrative proceedings, GLG’s internal control failures caused the overvaluation of the fund’s 25% private equity stake in a Siberian coal mining company by approximately $160 million for 25 months, resulting in inflated fee revenue of $7,766,667 to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.

GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee. According to the SEC’s order, GLG employees received information on a number of occasions calling into question the $425 million valuation for the coal company position, but there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all. According to the SEC, there was confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.

The order requires the GLG firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption. The order directs the GLG firms to cease and desist from violating or causing violations of various provisions of the federal securities laws. The GLG firms consented to the order without admitting or denying the charges. The SEC is establishing a fair fund to distribute money to harmed fund investors. The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679 and penalties totaling $750,000.

Sources: In the Matter of GLG Partners, Inc. and GLG Partners, L.P., Administrative Proceeding File No. 3-15641 (December 12, 2013); SEC Charges London-Based Hedge Fund Adviser and U.S.-Based Holding Company for Internal Control Failures, SEC Press Release 2013-259 (December 12, 2013). 

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 45


About this Author

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he received the Corporate Practice Institute Award and served as senior articles editor on the Marquette Law Review. He completed his undergraduate education at St. Norbert College, graduating as a member of the honors program and earning his bachelor’s degree, summa cum laude, in international economics and political science.

Chris is a member of the State Bar of Wisconsin and the American Bar Association.

Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and...