SEC Slams Hedge Fund for Allegedly Lying About Returns

The Securities and Exchange Commission has charged New Jersey-based hedge fund firm Yorkville Advisors with fraud, alleging they overvalued assets under management and exaggerated returns.

(October 18, 2012) — The Securities and Exchange Commission has charged New Jersey-based Yorkville Advisors with fraud, alleging they exaggerated returns and assets under management.

The SEC alleges that Yorkville Advisors, once one of the biggest hedge fund firms specializing in making private investments in public equities, exaggerated the reported returns of the hedge funds they managed to hide losses while increasing the fees collected from investors.

As outlined by the regulator, Yorkville Advisors’ Founder and President Mark Angelo, and Chief Financial Officer Edward Schinik enticed pension funds and other investors to invest in their hedge funds by “falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure,” the regulator said. The SEC noted that the firm misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.

“The analytics put Yorkville front and center on our radar screen,” said Bruce Karpati, chief of the SEC Enforcement Division’s Asset Management Unit. “When we looked further we found lies to investors and the firm’s auditors as well as a scheme to inflate fees by grossly overvaluing fund assets. We will continue to pursue hedge fund managers whose success is based on fiction rather than fact.”

The SEC also alleges that “by fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik enticed more than $280 million in investments from pension funds and funds of funds. This enabled Yorkville to charge the funds at least $10 million in excess fees based on the inflated values of Yorkville’s assets under management.”

In recent years, the SEC has upped its effort to proactively root out fraud at hedge funds. Earlier this month, for example, the agency has introduced a compliance exam for newly registered managers, spurred by changes enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Under the SEC’s new campaign, the National Exam Program (NEP) would make private investment advisers, including hedge fund and private equity firms, no longer exempt from registering with the agency. The exam would scrutinize the following “higher-risk areas of the business,” according to the SEC.