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‘Pervasive Compliance Failures’ Found at Hedge Fund Deer Park Road, SEC Says

The $2.5 billion firm and its CIO have been fined.

Hedge fund firm Deer Park Road Management has agreed to pay the Securities and Exchange Commission $5 million for “compliance failures” related to its asset-valuation policies, the regulator announced Tuesday.  

The firm’s chief investment officer Scott Burg will also pay a $250,000 penalty to settle the matter. “Burg was a cause of Deer Park’s violations,” the SEC said. 

Deer Park — a distressed-securities specialist managing more than $2.5 billion — settled the charges without admitting or denying them.

According to the SEC, the firm’s valuation policies for residential mortgage-backed securities were not “reasonably designed” for its business practices and then failed to implement those policies.  

“Deer Park’s pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow,” said Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit in a statement

A Deer Park spokesperson declined to comment.

According to the SEC’s administrative proceeding document, the valuation compliance issues allegedly took place from at least October 2012 through December 2015. The firm, at times, was allegedly unable to make certain that some of its residential mortgage-backed security investments were valued in accordance with generally accepted accounting principles (GAAP).  

The SEC’s case focused on Deer Park’s high-performing flagship: STS Partners Fund. “From 2009 through 2014, STS’ returns exceeded 20 percent each year, and from 2009, STS did not have a losing month for over 80 consecutive months, until around October 2015. Consequently, Deer Park during this period was ranked as one of the top and ‘most consistent performing’ hedge funds in the country,” the SEC’s administrative proceeding document said.  

The firm’s risk management committee, which oversaw pricing compliance, “was deficient,” according to the filing. Members included the chief compliance officer, who was a former geochemist and brother-in-law of one of the firm’s portfolio managers; its chief financial officer, who was previously a bookkeeper and tax accountant at a small accounting firm; and another relative of the portfolio manager, the SEC said. None of these three had experience in bond valuation, as per the filing.

In addition to paying fines, Deer Park Road consented to an SEC censure, the regulator said. It has also reportedly hired a new chief compliance officer with relevant experience, revised policies, and put in place new valuation and pricing surveillance measures. 

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