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

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

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

According to the SEC:

• 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.

Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, commented:

Fund managers can’t tell investors one thing and do another when assessing fees and valuing assets. Equinox’s misleading disclosures gave investors a distorted picture of how the firm determined compensation and valued significant fund holdings.

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