The US Securities and Exchange Commission (SEC) has charged a Connecticut-based hedge fund advisory firm AlphaBridge Capital Management for allegedly inflating the prices of securities in hedge fund portfolios they managed.
AlphaBridge and its owners, Thomas Kutzen and Michael Carino agreed to settle the charges and pay a $5m penalty.s
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The SEC alleged that AlphaBridge told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.
Instead, AlphaBridge issued internally-derived price quotes to broker-dealer representatives to pass off as their own.
According to SEC, the inflated valuation of the assets let AlphaBridge collect higher management and performance-based fees.
The SEC also filed a separate case against Richard Evans, a resident of Houston and a broker-dealer representative who assisted AlphaBridge Capital in the pricing scheme.
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By GlobalDataEvans, who cooperated in the SEC probe, has agreed to pay a $15,000 civil fine and one-year securities industry ban, the SEC said.
The SEC also found that AlphaBridhe misled the auditors of the fund during two-year end audits by suggesting that Evans independently generated data to support its prices.
AlphaBridge, Kutzen, and Carino neither admitted nor denied the findings.
The hedge fund will return $4m in disgorgement and almost $1m in penalties to compensate the fund’s overpayment of management and performance fees. The funds will later be closed.
SEC enforcement division asset management unit co-chief Julie Riewe said: "The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities. AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio."
