Hedge fund manager Deer Park Road Management Co. will pay a $5 million penalty to settle charges of compliance deficiencies related to valuation of fund assets, the SEC announced Tuesday.
Deer Park, described by the SEC as a prominent private fund manager of mortgage-backed securities with $2.5 billion in assets under management, did not admit or deny the findings but consented to a censure and agreed to cease and desist from further violations. The alleged violations occurred from at least October 2012 through December 2015.
According to its disclosed investment strategy, Deer Park bought deeply discounted high-yielding residential mortgage-backed securities for its flagship STS Partners Fund, for which returns from 2009 through 2014 exceeded 20% each year. From 2009 until late 2015, it was ranked as one of the top and "most consistent performing" hedge funds in the country, with assets growing from several hundred million dollars to more than $1.5 billion, the SEC said.
According to the SEC order, certain mortgage-backed securities in the STS Partners Fund were not valued properly and the company did not have policies and procedures to address the risk of traders undervaluing securities and the potential conflict of interest. It also failed to implement its existing policy, the SEC said.
Valuation was overseen by CIO Scott Burg, who will pay a $250,000 penalty, and a committee whose members did not have relevant expertise, the SEC said.
"Deer Park's pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow," said Daniel Michael, chief of the SEC enforcement division's complex financial instruments unit, in a statement. Improper valuation of assets can potentially lead to over- or underpayment of withdrawal proceeds, incorrect calculation of fees and inaccurate performance reporting, among other things, the SEC said.