S.E.C. Accuses Hedge Fund of Lying About Performance

The Securities and Exchange Commission filed a complaint Wednesday against a hedge fund that once managed as much as $1 billion in assets, accusing the firm of lying to its investors about performance and asset values to earn higher fees.

The agency said that as a result of the misrepresentation, the fund, Yorkville Advisors, persuaded investors to give it $280 million to manage, which translated into more than $10 million in excess fees. The complaint also names its founder and president, Mark Angelo, and its chief financial officer, Edward Schinik.

In a sharp defense, the firm put out a lengthy statement attacking both the S.E.C.'s case and its tactics, calling the efforts a “free money shakedown.”

“Yorkville Advisors is deeply disappointed that the S.E.C. has elected to file this litigation,” the firm, which is based in Jersey City, N.J., said in a statement. “Yorkville vigorously disputes all of the allegations contained in the S.E.C.'s comp laint as they lack merit and are entirely without support.”

In recent years, the S.E.C.has made a concerted effort to proactively root out fraud at hedge funds. Instead of relying solely on tippers and industry sources, a new unit was established to track so-called aberrational performance for signs of potential fraud. The case against Yorkville is the seventh such cause brought by the unit, and the fund is one of the larger ones to be charged.

“The analytics put Yorkville front and center on our radar screen,” said Bruce Karpati, head of the enforcement at the commission's asset management unit. “When we looked further, we found lies to investors and the firm's auditors as well as a scheme to inflate fees by grossly overvaluing fund assets.”

The S.E.C. says that Yorkville did not abide by its own policies for valuing assets, disregarded poor returns and withheld some of those returns from its auditor. It also lied to investors about how easily i t could sell off its assets, according to the complaint.

Some of these issue touch on the heart of investor distress during the 2008 financial crisis. Hedge funds often tucked hard to sell off assets in their investment vehicles, and when liquidity dried up, they were left holding unsellable items. In some cases, these assets were valued at a far higher price than they could have actually fetched on the open market, which required investors to continue paying high fees.

“Yorkville at all times has acted appropriately and implemented robust control procedures to ensure the proper valuation of assets. This has included employing two former S.E.C. enforcement attorneys to sit on its valuation committee,” the firm said. “This is yet another example of the S.E.C. wasting taxpayer dollars conducting an investigation and initiating a baseless enforcement action solely for the purpose of appearing proactive as opposed to taking on the difficult task of addressing the real issues that face our markets.”