GLG Partners, a division of one of the world’s biggest hedge funds, has agreed to pay almost $9 million to settle Securities and Exchange Commission charges that it overvalued its investment in Sibanthracite, a Siberian coal mining company, and in turn, inflated client fees.
The regulator has accused GLG, which is based in London and owned by the Man Group, of improperly valuing its investment in Sibanthracite and then failing to investigate when questions were raised about the inflated value. This allowed the hedge fund to pocket inflated fee revenue of $7.8 million over the course of more than two years, according to the regulator.
“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 S.E.C.’s enforcement division. “GLG’s pricing committee did not have the information and time it needed to properly value assets.â€
Hedge funds invest in both public companies that are valued by the stock market and private companies. As part of its internal policy for valuing private companies, GLG established an independent pricing committee to check the value of these investments on a monthly basis.
Determining the exact value of an investment is important because hedge funds typically charge their investors a yearly fee based on the total size of the fund’s assets. GLG collected a 2 percent annual fee and a 0.5 percent annual administrative fee based on the net asset value of all of its assets.
The S.E.C.’s order against GLG hinges on an investment made by Greg Coffey, a former fund manager for GLG’s Emerging Markets Growth fund, in 2007. The fund paid $210 million for a 25 percent stake in the Siberian coal mining firm with the intention of selling the stake ahead of an anticipated initial public offering.
But on March 31, 2008, GLG’s independent pricing committee approved a report stating the investment was worth $425 million, and that the increase in value was a result of a rise in coking coal prices from December 2012 to March 2013.
Mr. Coffey left the fund in April 2008. Over the course of two years, from November 2008 until the end of 2010, GLG received information and tips calling into question the value of the coal company.
At times, these tips never reached the independent pricing committee because of what the S.E.C. described as confusion among hedge fund managers, middle-office accounting personnel and senior management about who was responsible for passing on the information to the independent pricing committee.
In one documented instance, the hedge fund hired a global financial services firm in June 2010 to help it sell Sibanthracite. While this firm issued a report that stated the investment was worth $265 million â€" $160 million less than the original $425 million - this new value was not presented to GLG’s pricing committee until January 2011.
GLG has neither admitted nor denied any wrongdoing on the case. A spokeswoman for GLG said it was “pleased that this matter is resolved and remains committed to maintaining robust policies, procedures and practices in line with market conventions.â€
The hedge fund has agreed to a comprehensive review by a third-party consultant. It has also agreed to pay a fine of $7.8 million, plus interest of $437,679 and penalties of $750,000. The S.E.C. has created a fund to repay investors.
Shares in the Man Group, which inherited the Sibanthracite investment when it bought GLG in 2010, fell 2.5 percent to 80.45 pence ($1.32) a share on Thursday.
