WASHINGTON (Legal Newsline) - To hide losses and increase fees from investors, a former $1 billion hedge fund advisory firm and two executives schemed to overvalue assets and exaggerate reported returns of hedge funds, according to the Securities and Exchange Commission.
On Wednesday, the SEC charged the founder and president of the New Jersey-based Yorkville Advisors LLC, Mark Angelo, and chief financial officer, Edward Schinik, with portraying Yorkville as a firm that managed a highly-collateralized investment portfolio. This attracted pension funds and other investors to invest in their hedge funds, it says.
The safety and liquidity of the investments made by the hedge funds were allegedly misrepresented. Excessive fees were charged to the funds based on the fraudulently inflated values of the investments, according to the SEC.
This is the seventh case from the SEC's Aberrational Performance Inquiry. Performance that is seen as inconsistent with a fund's investment strategy or other standard create reason for further investigation and scrutiny by the Enforcement Divisions' Asset Management Unit initiative.
In the complaint filed in the U.S. District Court for the Southern District of New York, Yorkville, Angelo and Schinik are charged with defrauding investors in the YA Global Investments (U.S) LP and YA Offshore Global Investments Ltd hedge funds.
The SEC claims that Yorkville and the two executives failed to comply with Yorkville's stated valuation policies, did not pay attention to negative information about certain investments by the funds, withheld unfavorable information about fund investments from Yorkville's auditor which allowed them to continue with inflated values, and they misled investors about the liquidity of the funds, collateral underlying the investments and use of a third-party valuation firm.
By fraudulently attracting potential investors, the SEC alleges Angelo and Schinik enticed more than $280 million in investments from pension funds and funds of funds. As a result, Yorkville could then charge the funds at least $10 million in excess fees based on the inflated values of Yorkville's assets under management, the SEC says.
The SEC's complaint charges Yorkville with violating section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Yorkville also is charged with violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Angelo is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-8. Charges also include aiding and abetting Yorkville's violations of the Exchange Act and Advisers Act. Schinik is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and with aiding and abetting Yorkville's violations of the Exchange Act and Advisers Act.