AlphaBridge Capital Management and its two owners have been charged with fraudulent fund violation scheme by the Securities and Exchange Commission (SEC).
Allegations against AlphaBridge Capital
The SEC alleged that AlphaBridge Capital and its two owners, Thomas T. Kutzen, and Michael J. Carino committed fraudulent inflation in the prices of securities in the hedge fund portfolios they managed.
Philip Carret was an investor and founder of Pioneer Fund, one of the first mutual funds in the United States. Carret ran the mutual fund for 55 years, during which time an investment of $10,000 became $8 million. That suggests he achieved a compound annual return of nearly 13% for his investors. Q1 2021 hedge Read More
In its investigation, the SEC found that AlphaBridge Capital told investors and its auditors that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.
AlphaBridge instead provided internally-derived valuations to the representatives of broker-dealers to pass it off as their own. According to the Commission, the funds paid higher management and performance fees to AlphaBridge Capital due to the inflated valuation of the assets.
The SEC also filed a separate case against Richard L. Evans, a resident of Houston and a broker-dealer representative who assisted AlphaBridge Capital in the pricing scheme.
Evans cooperated in the investigation of the SEC. He agreed to pay a penalty of $15,000. He was prohibited from working in the securities industry for at least one year to settle the charges that he aided, abetted and caused violations by AlphaBridge Capital. He did not admit or deny the findings of the SEC.
The Commission also found that AlphaBridhe Capital misled the auditors of the fund during two-year end audits by suggesting that Evans independently generated data to support its prices. Carino actually developed data.
Julie M. Riewe, co-chief of the Asset Management Unit of the Enforcement Division of the SEC said, “The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities. AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.”
AlphaBridge Capital settles charges
AlphaBridge Capital and its owners, Thomas T. Kutzen, and Michael J. Carino agreed to pay a combined amount of $5 million to settle the charges.
The hedge fund would return $4 million in disgorgement and almost $1 million in penalties to compensate the fund’s overpayment of management and performance fees. The funds will be closed.
According to the SEC AlphaBridge Capital, violated the antifraud and other provisions of the Investment Advisers Act of 1940. Kutzen and Carino aided, abetted and caused the violations of the hedge fund.
AlphaBridge Capital, Kutzen, and Carino agreed to the entry of the SEC’s order without admitting or denying the findings.