GLG Partners, L.P., a London-based hedge fund adviser that managed GLG Emerging Markets Special Assets 1 Fund, and its former U.S.-based holding company, GLG Partners, Inc., were charged with internal control failures that led to the overvaluation of the fund’s assets and inflated fee revenues for the GLG firms. “Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement. “GLG’s pricing committee did not have the information and time it needed to properly value assets.”

According to the SEC’s order instituting settled administrative proceedings, GLG’s internal control failures caused the overvaluation of the fund’s 25% private equity stake in a Siberian coal mining company by approximately $160 million for 25 months, resulting in inflated fee revenue of $7,766,667 to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.

GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee. According to the SEC’s order, GLG employees received information on a number of occasions calling into question the $425 million valuation for the coal company position, but there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all. According to the SEC, there was confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.

The order requires the GLG firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption. The order directs the GLG firms to cease and desist from violating or causing violations of various provisions of the federal securities laws. The GLG firms consented to the order without admitting or denying the charges. The SEC is establishing a fair fund to distribute money to harmed fund investors. The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679 and penalties totaling $750,000.

Sources: In the Matter of GLG Partners, Inc. and GLG Partners, L.P., Administrative Proceeding File No. 3-15641 (December 12, 2013); SEC Charges London-Based Hedge Fund Adviser and U.S.-Based Holding Company for Internal Control Failures, SEC Press Release 2013-259 (December 12, 2013).