SEC Enforcement Action Against Former Oppenheimer Manager

On August 20, 2013, Federal securities regulators accused Brian Williamson, a former portfolio manager at Oppenheimer & Company (“Oppenheimer”), of misleading investors about the performance of a private equity fund-of-funds. These allegations follow on the heels of an announcement in March of 2013 that Oppenheimer had agreed to pay approximately $3.0 million to the Securities and Exchange Commission (“SEC”) in order to settle similar allegations brought forth against Oppenheimer. Click here to view the previous article.

The SEC investigation contends that Mr. Williamson misled investors regarding the performance of the Oppenheimer Global Resource Private Equity Fund I L.P. (“Oppenheimer Fund”), a fund of funds, by stating that holdings were valued “based on the underlying managers’ estimated values.” However, the SEC claimed that Mr. Williamson significantly overstated the value of the largest holding in comparison to the underlying fund manager’s estimated value. The valuation markup increased the internal rate of return from 3.8% to 38.3% for the quarter ended June 30, 2009.

Andrew J. Ceresney, the co-head of the SEC’s enforcement division, stated “Investors deserve and the law requires honest disclosure about how investments are valued. Mr. Williamson improperly lured investors to the private equity fund he managed by providing false and misleading information about the fund’s performance.”

The Oppenheimer case signals that many private equity fund managers have not dedicated the necessary resources to adhere to the stringent requirements set forth by recent legislation. With passage of the Dodd-Frank Act in July 2010, the SEC was given the power to more easily bring a claim against directors and officers for aiding and abetting a securities law violation. Prior to the Dodd-Frank Act, the SEC had to prove a director or officer had actual knowledge of a federal securities law violation in order to hold the director or officer liable. The Dodd-Frank Act substantially decreased the SEC’s burden of proof by proving the director or officer was “reckless” in not knowing of the violation. In effect, the SEC is now willing and able to pursue claims against directors and officers not for perpetrating frauds, but for making a mistake.

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has named valuation practices as one of its areas of focus in both investment advisor and investment company examinations, and the SEC’s Fiscal Year 2012 Financial Report listed the “valuation of investments that are privately placed, thinly-traded, or otherwise difficult to value as a high-risk activity” being focused on by the Enforcement Division.

Best practices and procedures that can help meet greater SEC regulation and scrutiny include:

• Adoption of written/documented valuation policies and procedures;
• Improving internal systems for retaining and monitoring fund holdings data;
• Establishing an internal pricing committee;
• Maintaining an advisory board or committee;
• Continuous investment monitoring; and
• Appointing an independent third-party valuation provider.

Houlihan Capital can prepare and review a fund’s valuation policies and provide clients with independent valuations of geographically diverse assets ranging from single investments to multi-class portfolios. The firm has a history of working closely with regulators, auditors, third-party administrators, investors, and some of the world’s largest private investment funds.

For more information on independent third party valuation services, please visit www.houlihancapital.com, contact Paul Clark (pclark@houlihancapital.com) at 312-450-8656.

Houlihan Capital is a leading, solutions-driven valuation, financial advisory and boutique investment banking firm committed to delivering superior client value and thought leadership in an ever-changing landscape. The firm has extensive experience in providing objective, independent and defensible opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers around the world, and private equity funds, hedge fund advisors, fund administrators, and other asset management firms benefit from Houlihan Capital’s comprehensive valuation and financial advisory services. Houlihan Capital is a Financial Industry Regulatory Authority (FINRA) and SIPC member, committed to the highest levels of professional ethics and standards.