Hedge Fund Adviser Accused of Inflating AUM to Increase Its Advisory Fees

September 4, 2015

The SEC brought an enforcement action against Chris Yoo and his advisory firm Summit Asset Strategies Investment Management (Investment Management), located in Bellevue, Washington, with fraudulently inflating the values of investments in the portfolio of Summit Stable Value Fund (SSVF), a hedge fund, they advised so they could attain unearned management fees. The SEC also charged Raymon Holmdahl, CPA, and Kanako Matsumoto, CPA, accountants for the firm Peterson Sullivan, LLP (Auditors), the fund’s outside auditors, with performing a deficient audit that enabled the firm to send misleading financial statements to investors.

The SEC found that Investment Management caused SSVF to materially overstate its asset values in its FY2013 financial statements. Specifically, Investment Management falsely claimed that SSVF had purchased 500,000 shares of an entity called Prime Pacific Bank in December 2012. Because the Prime Pacific Bank security was purportedly illiquid, Investment Management developed a financial model to value this asset. For FY2013, this model showed that SSVF’s interest in Prime Pacific Bank had more than tripled in value from the shares’ purported purchase price of $1.00 per share to $3.22 per share by the end of the fiscal year. As such, SSVF’s FY2013 financial statements presented the value of the claimed Prime Pacific Bank security as approximately $1.6 million. The putative increase in Prime Pacific Bank’s value enabled Investment Management to withdraw significantly more money as net fund profits from SSVF than it would otherwise have been entitled to under the terms of SSVF’s PPM.

In reality, the SEC stated that SSVF did not own any shares of Prime Pacific Bank. Instead, SSVF held 250,000 shares in a different entity, Prime Pacific Financial Services, Inc. (PPFS), which had a quoted trading price ranging between $0.27 per share to $0.70 per share in 2012 and 2013. Accordingly, SSVF’s interest in PPFS had a value worth less than $175,000 at fiscal year-end 2013. As a result of these irregularities, SSVF’s financial statements for FY2013 were materially overstated.

According to the SEC, SSVF’s audited financial statements for the year ended December 31, 2013, which Investment Management provided to SSVF’s investors, materially overstated the value of the fund’s assets by approximately $1.69 million. Because Investment Management was entitled to receive SSVF’s net fund profits as its compensation for advising SSVF, the overstatement allowed Investment Management to withdraw significantly more money from SSVF than was authorized under the terms of the fund’s private placement memorandum.

In a separate action, the SEC found that Peterson Sullivan issued an audit report containing an opinion that SSVF’s financial statements for the period ended December 31, 2013, which included the valuations of the fund’s assets and Investment Management’s draws from the fund, were presented fairly, in all material respects, in conformity with general accepted accounting principles (GAAP). Peterson Sullivan’s audit report also stated that the audit was conducted in accordance with auditing standards generally accepted in the United States. However, the SEC stated that the audit failed to comply with numerous American Institute of Certified Public Accountants (AICPA) auditing standards, the applicable professional standards for the audit of SSVF. These included:

  • failing to obtain sufficient appropriate audit evidence about the existence of certain fund assets,
  • failing to exercise appropriate professional judgment and professional skepticism, and
  • failing to properly supervise the financial statement audit.

Click https://www.sec.gov/litigation/complaints/2015/comp-pr2015-178.pdf to access the enforcement action.


Categories

Investment Advisers, Investment Companies