UPDATE 1-KCAP fund, execs settle charges of overstating assets

Wed Nov 28, 2012 12:45pm EST

WASHINGTON Nov 28 (Reuters) - KCAP Financial Inc and its top executives settled charges brought by U.S. securities regulators on Wednesday that they overstated fund assets during the financial crisis.

The Securities and Exchange Commission said the fund company did not report the fair market value of its debt securities and other investments in the fourth quarter of 2008.

The company agreed to settle the case without admitting or denying the charges, and was not required to pay any penalty.

KCAP Chief Executive Officer Dayl Pearson and its investment chief, R. Jonathan Corless, each agreed to pay $50,000 in penalties to settle the charges. The fund's former finance chief, Michael Wirth, agreed to a $25,000 penalty. All three neither admitted nor denied the charges.

In a statement announcing the settlement, KCAP's Pearson said the company was pleased to put the issue behind it. He also said the company had augmented its investment valuation methodology in 2010 to take into account market activity.

In its order the SEC accused KCAP of valuing certain collateralized loan obligation investments at cost. KCAP also valued its debt securities based on whether it expected to be repaid in full rather than at the exit price it could expect to get at the time, the SEC said.

In May 2010 the company restated the values of some of those investments, which had been overstated by about 27 percent, the SEC said.

The conduct violated reporting, books and records, and internal controls provisions of federal securities laws, the SEC said.

The case is the first from the SEC involving FAS 157, a financial accounting standard that went into effect in early 2008 that requires public companies to properly value their assets.

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