A unit of London hedge fund giant Man Group agreed to pay nearly $9 million to settle Securities and Exchange Commission charges that internal control failures caused the firm to inflate the value of an illiquid security, thus boosting its fees.
The regulator says these failures caused GLG Partners and its former holding company GLG Partners Inc. to overvalue the GLG Emerging Markets Special Assets 1 Fund’s 25 percent private equity stake in an emerging-markets coal mining company from November 2008 to November 2010. The SEC alleges that GLG employees on several occasions got information that called the position’s $425 million valuation into question, but that the firm didn’t have adequate policies in place to ensure that the information was provided to the firm’s independent pricing committee “in a timely manner or even at all,” the regulator says. As a result of the overvaluation, the fees were inflated and the holding company overstated its assets under management in its filings with the SEC, according to the announcement.
“There was confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee,” the SEC says in its announcement. Under the SEC’s latest order, the GLG firms must hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures. The GLG firms also agreed to relinquish $7,766,667 and pay prejudgment interest of $437,679 and penalties totaling $750,000.
For its part, GLG says the settlement pertained to “GLG’s valuation policies and procedures and, in particular, the valuation of a single private equity position” in a special purpose vehicle that has since been disbanded. “GLG is pleased that this matter is resolved and remains committed to maintaining robust policies, procedures and practices in line with market conventions,” the firm says in a statement.
London-based GLG was founded in 1995 by Noam Gottesman, Pierre Lagrange and Jonathan Green — the latter left the firm in 2003 — as a division of Lehman Brothers International. The first initials of the men’s last names make up the firm’s name. The three partners had worked together at Goldman Sachs Private Client Services in London from the late 1980s to the mid-’90s before leaving to start GLG.
The firm went public in 2007 in a reverse merger, one of the first among a handful of alternative investment firms to go public. Under the transaction, Gottesman and Lagrange each received a package of stock and cash valued at the time at about $970 million, which heavily explained their enthusiasm for going public.
However, shortly afterward, the firm experienced a number of setbacks and frustrations. GLG’s then–star manager and emerging-markets specialist, Greg Coffey, left the firm, hoping to start his own company. Investors subsequently yanked $4 billion from the firm. Together with losses and redemptions resulting from the 2008 market implosion, GLG wound up losing one third of its assets.
GLG was acquired by Man in September 2010. This means most of the issues cited Thursday by the SEC played out while GLG was public and while it was being acquired by Man. The fundamentally-focused GLG was acquired in part to diversify Man Group’s fund offerings and bolster returns, given that Man’s flagship AHL computer-driven trading strategy has posted losses and suffered heavy redemptions over the past couple of years.
GLG has had a few other run-ins with regulators in various countries during the past decade. In 2006, Britain’s Financial Services Authority fined the firm and former managing director Philippe Jabre 750,000 pounds each for using confidential information regarding a 2003 convertible bond sale for Japan’s Sumitomo Mitsui Financial Group. In late December 2006, GLG and Deutsche Bank were fined by French market regulators for alleged trading abuses related to a 2002 convertible bond sale by telecom manufacturer Alcatel. GLG was fined 1.2 million pounds.
Jabre left the firm in February 2006 and withdrew his appeal of his FSA fine. He now runs his own Geneva-based firm, Jabre Capital Partners, to which he recruited former longtime GLG marketing head Mark Cecil.
In June 2007, GLG settled civil charges with the SEC that it had engaged in illegal short-selling in connection with 14 public offerings. The SEC alleged that over a two-year period, GLG made more than $2.2 million in four of its managed hedge funds by engaging in multiple violations of a securities rule that prohibits covering short sales with securities obtained in a public offering. Without admitting or denying the allegations in the SEC’s complaint, GLG agreed to pay a $500,000 penalty. In a related administrative proceeding, the SEC issued a settled cease-and-desist order that found that from July 2003 through May 2005, GLG violated the same rule on 16 occasions in 14 different public offerings. Without admitting or denying the findings, GLG agreed to cease and desist from committing or causing any future violations and pay disgorgement of $2.2 million and prejudgment interest of nearly $490,000. GLG also agreed to adopt and implement certain policies and procedures. Although none of the fines were hefty and the firm agreed to settle the cases, it did suffer reputational damage at the time.
