Colorado-based investment adviser Deer Park Road Management Company (Deer Park) has agreed to pay a $5 million penalty after an investigation by the Securities and Exchange Commission (SEC), to settle charges stemming from compliance deficiencies. The deficiencies contributed to the firm’s failure to ensure that certain securities in its flagship STS Partners fund were valued properly.
The firm operates in the mortgage-back securities space and its STS Partners Fund has been ranked as one of the most consistent performing hedge funds in the United States. However, according to the investigation it has failed to implement policies and procedures to address the risk that its traders were undervaluing securities and selling for a profit when needed. In addition, Deer Park failed to guard effectively against its traders providing inaccurate information to a pricing vendor, and later using the prices it got back to value bonds.
The fund manager’s chief investment officer Scott Burg has also agreed to pay a $250,000 penalty. The SEC investigation found that he oversaw the valuation of certain assets in the flagship fund and approved valuations that the traders flagged as “undervalued” with notations to “mark up gradually.” Furthermore, the committee overseeing valuation was a comprised of the principal’s relatives and others without relevant expertise.
Deep Park neither admitted or denied the findings in the SEC’s order, but consented to a censure. It agreed, alongside Mr Burg, to cease and desist from committing or causing any violations and future violations of a provision of the Investment Advisers Act, requiring reasonably designed policies and procedures.
The SEC’s investigation was conducted by William Finkel and Gregory Smolar of the Complex Financial Instruments Unit and Douglas Smith of the New York office. They were assisted by Ling Yu of the Office of Compliance Inspections and Examinations as well as by Dugan Bliss and Christopher Dunnigan. Osman Nawaz and Mr Michael supervised the case.
Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit commented on the case.
He said: “Valuation of client assets is a critically important area for investment advisers. Deer Park’s pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow.”
