Oppenheimer to Pay $2.8 Million to Settle SEC Charges

Oppenheimer & Co. will pay $2.8 million to settle allegations brought by the Securities and Exchange Commission (SEC).

The SEC alleged that two investment advisers at Oppenheimer & Co. with misled investors about the valuation policies and performance of a private equity fund they manage.

Oppenheimer was represented by Nader Salehi of Bingham McCutchen in New York.

An SEC investigation found that Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued “based on the underlying managers’ estimated values.”

However, the portfolio manager of the Oppenheimer fund actually valued the fund’s largest investment at a significant markup to the underlying manager’s estimated value, a change that made the fund’s performance appear significantly better as measured by its internal rate of return.

The Massachusetts Attorney General’s office announced a related action and additional financial penalty of $132,421 against Oppenheimer.

“Honest disclosure about how investments are valued and how performance is measured is vital to private equity investors,” said George S. Canellos acting director of the SEC’s Division of Enforcement.  “This action against Oppenheimer for misleadingly writing up the value of illiquid investments is clear warning that the SEC will not tolerate lax disclosure practices in the marketing of private equity funds.”

According to the SEC’s order instituting settled administrative proceedings, the Oppenheimer advisers marketed Oppenheimer Global Resource Private Equity Fund I L.P. (OGR) to investors from around October 2009 to June 2010.

OGR is a fund that invests in other private equity funds, and it was marketed primarily to pensions, foundations, and endowments as well as high net worth individuals and families.

According to the SEC’s order, OGR’s largest investment – Cartesian Investors-A LLC – was not valued based on the underlying managers’ estimated values.

OGR’s portfolio manager himself valued Cartesian at a significant markup to the underlying manager’s estimated value.

OAM’s change in valuation methodology resulted in a material increase in OGR’s performance as measured by its internal rate of return, which is a metric commonly used to compare the profitability of various investments. For the quarter ended June 30, 2009, the portfolio manager’s markup of OGR’s Cartesian investment increased the internal rate of return from approximately 3.8 to 38.3 percent.

“Particularly in the current difficult fundraising environment that can incentivize private equity managers to artificially inflate portfolio valuations, firms must implement policies and procedures to ensure that investors receive performance data derived from the disclosed valuation methodology,” said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit.  “Oppenheimer failed to implement such procedures and provided investors with misleading information about its valuation policies and performance numbers.”

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