The Securities and Exchange Commission fined a Connecticut-based hedge fund advisory firm for fraudulently inflating the prices of residential mortgage-backed securities in hedge fund portfolios it managed.
According to a release from the SEC, 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.
Instead, AlphaBridge gave internally-derived price quotes to broker-dealer representatives to pass off as their own, the SEC said. The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.
As a result of the SEC investigation and subsequent charges, AlphaBridge and its owners Thomas Kutzen and Michael Carino agreed to pay $5 million combined to settle the charges.
Additionally, the SEC charged Richard Evans, who lives in Houston, for assisting in the AlphaBridge pricing scheme while working as a broker-dealer representative.
The SEC said that 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, the SEC said.
According to the SEC, AlphaBridge also misled the funds’ auditor during two year-end audits by stating that Evans independently generated data to support AlphaBridge’s prices.
The data was actually developed by Carino, the SEC said.
“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie 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.”
AlphaBridge, Kutzen, and Carino consented to the entry of the SEC’s order without admitting or denying the findings. The SEC said that 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.