FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
07/01/2015 10:30 AM EDT
The Securities and Exchange Commission charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed.
An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities. AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.
AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges.
“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “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.”
The SEC separately charged Richard L. Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative. Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge. Evans neither admitted nor denied the findings.
According to the SEC’s orders instituting settled administrative proceedings, AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices. Carino actually developed the data himself.
The SEC’s order finds that AlphaBridge violated and Kutzen and Carino aided and abetted and caused violations of the antifraud and other provisions of the Investment Advisers Act of 1940. AlphaBridge, Kutzen, and Carino consented to the entry of the SEC’s order without admitting or denying the findings. AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years. AlphaBridge will return more than $4 million in disgorgement and nearly $1 million in penalties to compensate for the funds’ overpayment of management and performance fees, and the firm will then close down the funds.
The SEC’s investigation was conducted by staff in the Asset Management Unit and Boston Regional Office, including Robert Baker, Brian Fitzpatrick, Patrick Noone, Naomi Sevilla, and Kathleen Shields. The examination that led to the investigation was conducted by Lily Chan-Sann, Michael McGrath, and Di Tu. The SEC appreciates the assistance of the Bermuda Monetary Authority as well as the New Orleans office of the Financial Industry Regulatory Authority and the Boston office of the U.S. Department of Labor’s Employee Benefits Security Administration.