SEC Puts Coal In GLG Stockings

December 16, 2013

On December 12, 2013, the Securities and Exchange Commission ("SEC") charged London-based hedge fund adviser GLG Partners L.P. ("GLGL") and its former U.S.-based holding company GLG Partners Inc.("GLGI") with internal controls failures that led to the overvaluation of the assets of the GLG Emerging Markets Special Assets Fund (the "Fund's").  Concurrent with the announced charges, GLGL and GLGI agreed to settle the charges for $9 million. In the Matter of GLG Partners, Inc. and GLG Partners, L.P., Respondents (Order Instituting Proceedings, 34 Act Release 71050, Accounting and Auditing Enforcement Release 3516, Administrative Proceeding No. 3-15641 / December 12, 2013). 

SIDE BAR: GLGI is a Delaware corporation with its principal offices in New York, NY. During the relevant times, GLGI was listed on the New York Stock Exchange and the entity was the holding company for various affiliates including the United Kingdom investment adviser GLGP, which had been its primary subsidiary. GLGI and GLGP shared senior management. On October 14, 2010, GPGI was acquired by a U.K.-listed issuer and its stock and warrants are no longer listed.

Coal In Their Stockings

The SEC Order Instituting Proceedings ("OIP") alleged that from November 2008 to November 2010, the GLG firms overvalued a 25% equity stake in an emerging-market coal mining company that was held by the Fund, which was managed by the GLG firms. Contrary to the GLG firms' asset valuation policies, which required the monthly valuation of the coal company position by an independent pricing committee, the position was purportedly valued at $425 million notwithstanding information that was purportedly known by GLG employees to the contrary. The OIP asserts that the overvaluation amounted to about $160 million that was permitted to stand for some 25 months, resulting in $7,766,667 of inflated fee revenue. The erroneous valuation further cascaded into erroneous SEC filings from 2008 through the second quarter of 2010. 

Poor Timing

The OIP alleges that inadequate policies and procedures failed to timely direct the valuation data to the independent pricing committee.  Moreover, the OIP asserts that managers, middle-office accounting personnel, and senior management were uncertain as to who was responsible forwarding the cited data to the committee.  For example, as set forth in Paragraph 18 of the OIP:

18. GLG obtained a third-party valuation of Coal Co. in January 2010. The EM Fund
co-manager's primary objective in obtaining the third-party valuation report was to assist in GLG's private-market attempts to sell the EMSA1 Fund's stake in Coal Co. rather than as a pricing document to be submitted to the IPC. He obtained a brief, free valuation report from one of EM Fund's brokers, as a client accommodation. When he later forwarded the report to the middle office accounting staff, the middle-office accounting staff, who lacked expertise in valuing assets, assumed that the report was sufficient for the IPC to base pricing decisions upon. In actuality, the report was based on limited sources of information, and the third-party firm had made no attempt to contact Coal Co. directly in order to obtain or verify information contained in the report. Nevertheless, the third-party report reflected a valuation for the EMSA1 Fund's Coal Co. stake of $350 million, which was $75 million less than the EMSA1 Fund's $425-million mark.

As a consequence of the improper valuation, the OIP contends that the GLG entitites benefited from an overvaluation of the fund's assets and inflated fee revenue derived by the firms. In addition to the imposition of a Cease-And-Desist, the firms agreed to make payments of:
  • $7,766,667 in disgorgement, 
  • $437,679 prejudgment interest, and 
  • $750,000 in penalties 
The OIP provides that the firms hire an independent consultant to:
  • improve the cited valuation policies and procedures
  • recommend new policies and procedures for the valuation of assets and 
  • test the effectiveness of the policies and procedures after adoption.  
The firms consented to the Order without admitting or denying the charges.  

Bill Singer's Comment

Compliments the the SEC Staff on this one!  A very well documented and compelling fact pattern.  Serious investors should take the time to read the full-text OIP to better understand the need for due diligence on all potential investments -- and to better comprehend that so-called "valuations" may not be as reliable as you expect.  

READIn the Matter of GLG Partners, Inc. and GLG Partners, L.P., Respondents (Order Instituting Proceedings, 34 Act Release 71050, Accounting and Auditing Enforcement Release 3516, Administrative Proceeding No. 3-15641 / December 12, 2013).