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Judge axes key SEC claims that New Jersey hedge fund firm inflated assets

NEW YORK (Reuters) - A federal judge has dismissed the central claims of a U.S. Securities and Exchange Commission lawsuit accusing a New Jersey hedge fund firm of “grossly” exaggerating the value of its investments to boost fees during the global financial crisis.

In a 79-page decision on Thursday, U.S. District Judge George Daniels in Manhattan found “no material evidence of fraud or negligence” to support SEC claims that Yorkville Advisors LLC, founder and President Mark Angelo and Chief Financial Officer Edward Schinik inflated asset values.

Daniels said the SEC could pursue claims that the defendants misrepresented to investors the role of an outside valuation firm, and Angelo negligently overstated his funds’ cash stake.

Yorkville’s assets peaked at more than $1 billion, the SEC said in its October 2012 complaint.

An SEC spokeswoman declined to comment.

“The court confirmed our theory from the start: that the SEC’s claims of valuation fraud made no sense and that there was never any fraudulent valuation of the portfolio much less a scheme to inflate fees,” the defendants’ lawyers Caryn Schechtman and Patrick Smith said in a statement.

Angelo said separately: “The SEC brought very serious charges that named me personally and falsely accused me of fraud. As I said all along, these claims were completely baseless. Yesterday Judge Daniels agreed.”

Daniels’ decision is a setback for the SEC, which brought the case as part of its “Aberrational Performance Inquiry,” an initiative to crack down on hedge funds posting returns that looked suspicious.

The regulator accused Yorkville, which typically invested in small start-ups or troubled companies, of ignoring “obvious decreases” in asset values to lure investors.

It said this enabled the Jersey City, New Jersey-based firm to raise more than $280 million from pension funds and funds of funds, and collect $10 million of undeserved fees.

Yorkville allegedly inflated the value of 15 holdings, out of 265, representing one-third of its asset base, court papers show. The alleged scheme ran from April 2008 to January 2010, the SEC said.

Daniels said the SEC could pursue claims that Yorkville misled investors into believing it was using Pluris Valuation Advisors LLC to help price some investments after having decided to stop because it thought Pluris’ valuations were too low.

The judge also let the SEC pursue a claim that Angelo misled an investor in December 2008 by allegedly saying his funds had “about $100 million in cash.”

The case is SEC v Yorkville Advisors LLC et al, U.S. District Court, Southern District of New York, No. 12-07728.

Reporting by Jonathan Stempel in New York; Editing by David Gregorio