The SEC brought an enforcement action against Equinox Fund Management LLC, an alternative fund manager based in Denver, Colorado, for overcharging investors and misleading investors about how the firm values fund assets. The SEC stated that Equinox calculated management fees contrary to the method described in registration statements for a managed futures fund called The Frontier Fund (TFF), and the firm also deviated from its disclosed valuation methodology for some TFF holdings.
TFF operates as a series trust, with numerous series engaged in separate trading strategies. The assets of each TFF series are valued and accounted for separately, and each series strikes a daily NAV. Each TFF series registered the offering of its units under the Securities Act. During the relevant period (which is primarily from 2009 through 2011), TFF had approximately 15,000 to 20,000 investors and between $800 million and $1 billion in net assets.
Equinox settled the charges brought by the SEC and pursuant to that settlement has agreed to refund investors approximately $5.4 million in excessive management fees collected during a seven-year period plus $600,000 in prejudgment interest. Equinox also agreed to pay a $400,000 penalty.
According to the SEC:
• TFF’s registration statements disclosed that Equinox charged management fees based upon the net asset value (NAV) of each series. But Equinox actually used the notional trading value of the assets, which is the total amount invested including leverage. Equinox consequently overcharged the fund $5.4 million in fees from 2004 to 2011.
TFF’s Form 10-K for 2010 and Forms 10-Q for the first and second quarters of 2011 disclosed that its methodology of valuing certain derivatives was “corroborated by weekly counterparty settlement values.” In fact, Equinox received information during that timeframe showing that its valuation of certain options was substantially higher than the counterparty’s valuations.
• TFF’s Form 10-Q for the third quarter of 2011 disclosed that an option had been transferred between two series consistent with TFF’s valuation policies. But it was actually transferred using a different valuation methodology than substantially identical options held by other TFF series.
• TFF’s Form 10-Q for the second quarter of 2011 failed to disclose as a material subsequent event the series’ early termination of an option that constituted its largest investment at a materially lower valuation than had been recorded for that option.
Click https://www.sec.gov/litigation/admin/2016/33-10004.pdf to access the enforcement action.