SEC Seeks Special Master in Case Involving NAV Mismarking Scheme

Who may be interested: Boards of Directors of funds and personnel responsible for calculating a fund’s net asset value (NAV).

Quick Take: The SEC recently filed a settled action against a mutual fund (Fund) relating to an alleged mismarking scheme in which the Fund continually overstated its NAV, resulting in the purchase and sale of shares by investors at materially inflated NAVs.

On November 10, 2022, the SEC filed a complaint against a Fund alleging violations of the pricing provisions of Rule 22c-1 under the Investment Company Act and requesting the appointment of a Special Master to oversee the return of remaining funds to harmed investors. The compliant describes a mismarking scheme in which the chief investment officer (CIO) of the Fund’s investment adviser caused the Fund’s reported NAV to be materially and falsely overstated.

The complaint states that from at least February 2017 through February 2021, the CIO altered certain parameters in a third-party pricing software used to value derivatives held by the Fund in order to artificially inflate the derivatives’ value. This mismarking caused the Fund to continually report an overstated NAV at varying levels; at times by more than 30%. In February 2021, the Fund filed an application with the SEC to suspend redemptions in the Fund, which the SEC approved the same day, and began liquidating Fund assets to distribute to shareholders.

The Fund has agreed to settle the charges in the complaint and consented to the appointment of a Special Master to oversee the remainder of the liquidation of Fund assets and the return of funds to harmed investors. The settlement, which is subject to court approval, permanently enjoins the Fund from further violations of Rule 22c-1. In a separate proceeding, the chief compliance officer of the Fund’s investment adviser agreed to settle charges brought against him by the SEC for his role in the mismarking scheme. Both the SEC and Department of Justice have ongoing cases against the CIO.

The Complaint may be found here