Oppenheimer & Company will pay nearly $3 million to settle accusations by federal and state regulators that it misled investors about the performance of one of its private equity funds, in a case that signals stepped-up scrutiny of the buyout industry and how it values its holdings.
The Securities and Exchange Commission said that Oppenheimer had inflated the value of the largest investment in its fund. The false valuation raised the fund’s internal rate of return â€" the preferred performance metric for private equity vehicles â€" to about 38 percent from 3.8 percent, the S.E.C. said.
“Honest discloure about how investments are valued and how performance is measured is vital to private equity investors,†said George S. Canellos, the S.E.C.’s acting director of enforcement. “This action against Oppenheimer for misleadingly writing up the value of illiquid investments is clear warning that the S.E.C. will not tolerate lax disclosure practices in the marketing of private equity funds.â€
In recent years, the regulator has grown concerned over how private equity firms value their holdings, many of which are illiquid and hard to measure. Unlike mutual funds that own publicly traded stocks, private equity firms own private companies whose values can be difficult to determine.
Regulators have said that they are worried that certain firms might be embellishing returns in order to impr! ess prospective investors in their funds. S.E.C. officials have said that in the currently difficult fund-raising environment, there is a possible incentive for firms to exaggerate the value of their portfolios.
As part of its settlement, Oppenheimer agreed to pay the S.E.C. a fine of about $620,000 and return about $2.3 million to investors. It neither admitted nor denied the accusations. The firm also resolved a parallel action brought by the Massachusetts attorney general’s office, agreeing to pay an additional penalty of about $132,000.
An Oppenheimer spokesman said that the firm thought it had put in place additional policies and procedures related to the valuation of its funds and was pleased to put this matter behind it.
The Oppenheimer fund at the center of the case was a so-called fund of funds â€" a private equity fund that invested in other private equity vehicles. Called Oppenheimer Global Resource Private Equity Fund, it focused on investments in the energy sector. It was a elatively small fund, managing about $100 million, according to securities filings.
In 2009, just after the financial crisis hit, executives managing the Oppenheimer fund started to fudge its performance when trying to raise money from prospective investors, the S.E.C. said.
The Oppenheimer managers propped up the value of its largest position, a stake in a fund called Cartesian Investors, according to the regulators. Cartesian, it turned out, had only one holding, S. C. Fondul Proprietatea, a company that the Romanian government had set up to compensate its citizens for property seized by the Communist government.
Oppenheimer deceived the fund’s investors, which included public pension funds and school endowments, by telling them that outside auditors had vetted the returns. It also said that Cartesian itself had used a third-party valuation firm to determine its value. Neither was true, according to the S.E.C.
As the holdings of private equity firms have grown larger and m! ore compl! ex, a lucrative cottage industry has developed around providing independent valuations of hard-to-value investments. Last December, the Carlyle Group, one of the world’s largest private equity firms, led a group that agreed to buy Duff & Phelps, a firm that has a specialty in this area, for about $665 million.
