By Aruna Viswanatha
WASHINGTON, Oct 17 (Reuters) - Securities regulators on Wednesday sued Yorkville Advisors LLC and its top executives, accusing the New Jersey hedge fund of reporting false and inflated values for some of its investments.
The Securities and Exchange Commission lawsuit targeted Yorkville, which has been one of the largest funds specializing in thinly traded micro-cap and small-cap companies, founder and President Mark Angelo and Chief Financial Officer Edward Schinik.
The firm misreported values as the financial crisis hit in 2008 and 2009 and market conditions deteriorated, and its returns during the period consisted mostly of unrealized gains from marked-up investments, the SEC said.
The scheme let Yorkville improperly boost its management fees and led it to improperly receive more than $10 million in unearned fees, the SEC said.
Yorkville said in a statement it “vigorously disputes” the allegations. It said two former SEC enforcement attorneys sit on its valuation committee and never took exception with the valuations at issue.
“After enduring an SEC investigation that was clearly driven by an agenda, Yorkville looks forward to defending this matter,” it said.
The SEC accused Yorkville, which once managed more than $1 billion in assets, of creating and providing false and misleading documents to its auditors to further the scheme.
The firm also made false and misleading statements to its investors between April 2008 and January 2010 about the value of its investments and other matters, the SEC said.
The “false portrayal of Yorkville as a firm that employed ‘robust’ internal controls caused pension funds and funds of funds to invest over $280 million in the Funds,” the SEC said.
Regulators are seeking fees the firm obtained as a result of the alleged misrepresentations.
The case is one of a series stemming from an SEC initiative to use risk analytics to identify hedge funds with suspicious returns.
“The analytics put Yorkville front and center on our radar screen,” Bruce Karpati, who heads the SEC enforcement division’s asset management unit, said in a statement.
“We will continue to pursue hedge fund managers whose success is based on fiction rather than fact,” he said.