The Commission and Yorkville Advisors, LLC stipulated to the dismissal of the enforcement action brought against the adviser centered largely on valuation questions following a ruling in which the Court largely granted a defense motion for summary judgment. See Lit. Rel. No. 24326 (October 29, 2018). Essentially the Court held that either the agency did not have evidence to support its claims or that it had misinterpreted the evidence. In two instances the Court found that factual conflicts precluded summary judgment. SEC v. Yorkville Advisors, LLC, Civil Action No. 12 CIV 7728 (S.D.N.Y. Opinion March 29, 2018).
Named as Defendants in the action were prominent hedge fund manager Yorkville Advisor, LLC and two of its principals Mark Angelo and Edward Schinik. Yorkville is a registered investment adviser founded by Mr. Angelo. Mr. Schinik served as COO. The Advisor managed the YA Global Investments (U.S.) LP fund, the YA Offshore Global Investments, Ltd. fund and the YA Global Investments, LP fund.
The investment strategy generally called for investments to be put into privately negotiated structured equity and debt in public and private companies, according to the complaint. Key assets were incorrectly valued as the market crisis unfolded. Yorkville overvalued a series of investments by at least $50 million as of December 2008 and $47 million as of the end of December 2009. The complaint claimed that the supporting documentation of the Defendants reflected these over valuations.
Misrepresentations were also made to prospective investors to lure them into putting their money in the funds. Those concerned the collateral underlying certain securities obtained as investments, the liquidity of the Funds and their internal procedures. The complaint alleged violations of each subsection of Securities Act section 17(a), Exchange Act section 10(b) and Advisors Act sections 206(1) and (2) and 204(4). It also alleged control person liability under Exchange Act section 20(a).
Defendants moved for summary judgment. The motion focused primarily on the period 2008 and 2009 during which the SEC claimed there were fraudulent misrepresentations regarding the value of 15 Yorkville investments out of the 265 positions. In addition there were certain other misrepresentations regarding the internal procedures and related issues, according to the Commission.
In assessing the motion for summary judgment the Court concluded that the allegations fell into two groups. The first group alleged misrepresentations regarding the value of the 15 positions. The second focused on what the Court called “one-off misrepresentations concerning the Fund’s internal procedures and financial health.” In a lengthy opinion reviewing each of the Commission’s claims, the Court concluded that either the evidence supporting the allegation was lacking or the asserted factual support was misstated, with two limited exceptions.
After rejecting SEC claims that there was a motive or opportunity to commit fraud that would support a finding of scienter, the Court turned to the question of whether the evidence supported a strong inference of wrong doing. It did not the Court found. For example, the Commission claimed that Mr. Schinik’s intent was demonstrated by his failure to disclose what it called key documents to the outside auditors during the period as well as his affirmative misrepresentations regarding the 15 positions to the investors and auditors. The Court rejected these claims, noting “First and foremost, internal and external reviews of YA’s valuations of the 15 Positions never showed any evidence of fraud or deceit . . . [the valuation committee] met regularly and attempted to value assets that were inherently difficult to value and required subjective judgments, due to their illiquid and customized nature. There is no evidence that Defendants Schinik or Angelo instructed anyone to withhold material information from the VC [valuation committee], or delay the write down of any investment.”
The Court also rejected claims by the SEC that misrepresentations were made regarding the valuation policies. For example, the Commission argued that a letter to the outside auditors falsely claimed that “’In some cases, the General Partner employed financial models to determine a ‘best estimate’ valuation . . .’” false because models were not used. The Court found, however, that “the record is replete with instances in which YA used financial models in connection with their investments.” The Court rejected most of the Commission’s other claims for similar reasons.