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SEC: Alternative Fund Manager Overcharged Fees, Misled Investors

FOR IMMEDIATE RELEASE
2016-11
Washington D.C., Jan. 19, 2016

The Securities and Exchange Commission today announced that a Denver-based alternative fund manager has agreed to settle charges that the firm overcharged management fees and misled investors about how it valued certain assets.

An SEC investigation found that Equinox Fund Management LLC calculated management fees contrary to the method described in registration statements for a managed futures fund called The Frontier Fund (TFF), and the firm also deviated from its disclosed valuation methodology for some TFF holdings.

Equinox has agreed to refund investors approximately $5.4 million in excessive management fees collected during a seven-year period plus $600,000 in prejudgment interest.  Equinox also agreed to pay a $400,000 penalty.

“Fund managers can’t tell investors one thing and do another when assessing fees and valuing assets,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Equinox’s misleading disclosures gave investors a distorted picture of how the firm determined compensation and valued significant fund holdings.”

According to the SEC’s order instituting a settled administrative proceeding:

  • TFF’s registration statements disclosed that Equinox charged management fees based upon the net asset value (NAV) of each series.  But Equinox actually used the notional trading value of the assets, which is the total amount invested including leverage.  Equinox consequently overcharged the fund $5.4 million in fees from 2004 to 2011.
  • TFF’s Form 10-K for 2010 and Forms 10-Q for the first and second quarters of 2011 disclosed that its methodology of valuing certain derivatives was “corroborated by weekly counterparty settlement values.”  In fact, Equinox received information during that timeframe showing that its valuation of certain options was substantially higher than the counterparty’s valuations.
  • TFF’s Form 10-Q for the third quarter of 2011 disclosed that an option had been transferred between two series consistent with TFF’s valuation policies.  But it was actually transferred using a different valuation methodology than substantially identical options held by other TFF series.
  • TFF’s Form 10-Q for the second quarter of 2011 failed to disclose as a material subsequent event the series’ early termination of an option that constituted its largest investment at a materially lower valuation than had been recorded for that option.

Equinox consented to the entry of the SEC’s order finding that the firm violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and caused TFF’s violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13.  Without admitting or denying the findings, Equinox agreed to be censured and must cease and desist from further violations.

The SEC’s continuing investigation is being conducted by John Mulhern, Brian Fitzpatrick, and Michael Cohn of the Asset Management Unit with the assistance of Tracy Bowen of the Denver Regional Office.  The case is being supervised by Kurt Gottschall of the Asset Management Unit.  The SEC appreciates the assistance of the Commodity Futures Trading Commission.

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