The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.
The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.
According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.
The SEC contends that from at least 2001 through April 2013 the hedge funded advisory firm made misrepresentations to investors, the Funds’ administrator, and an auditor about the way AlphaBridge values securities in the fund. The misrepresentations were purportedly made in financial statements, other statements to existing and prospective investors, AlphaBridge’s own written valuation policy, and when answering due diligence questions.
The firm’s owners are accused of stating that AlphaBridge got its monthly price quotes for the securities from two independent brokerage firms when it was actually using the arithmetic average of the quotes to set the securities’ price. By 2010, the hedge fund advisory firm was purportedly coming up with its own valuations and giving them to the brokerage firms’ registered representatives.
Without denying or admitting to the charges, AlphaBridge and its two owners, who are accused of aiding, abetting, and causing violations of the Investment Advisers Act of 1940, have settled the SEC charges. Carino is barred from working in the securities industry for three years.
AlphaBridge will give back over $4 million in disgorgement and almost $1 million in penalties. The $5 million covers compensation for the funds’ overpayment of performance fees and management. AlphaBridge will then shut down the funds.
Also charged separately is Houston-based broker Richard L. Evans for helping with the pricing scam. Without denying or admitting to the findings, Evans will pay a $15,000 penalty. He is charged with aiding and abetting and causing AlphaBridge’s violations. Evans is barred for at least a year from working in the securities industry.
The SEC’s order against AlphaBridge states that during two year-end audits, the firm misled the auditor of the funds when it suggested that Evans had independently come up with data to support the hedge fund advisory firm’s prices. The regulator said that it was Carino who came up with the data.
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