STEAMBOAT SPRINGS — Steamboat Springs’ Deer Park Road Management Co. has agreed to pay a $5 million penalty in the wake of charges of compliance deficiencies that contributed to the firm’s failure to ensure that certain securities in its flagship fund were valued properly.
The Securities and Exchange Commission announced the penalties, which also included a $250,000 penalty against the fund’s chief investment officer Scott Burg, in a news release posted June 4.
In anticipation of the proceedings Deer Park Road Management, and Burg agreed to the settlements without admitting or denying the findings in the SEC order.
“Valuation of client assets is a critically important area for investment advisers,” Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in the release. “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.”
The order said that the SEC investigation found that the Steamboat-based investment adviser Deer Park Management, in connection with it’s flagship STS Partners’ fund, failed to adopt and implement reasonably designed compliance policies and procedures relating to valuation of fund assets.
The order states that the matter arises from violations of the Compliance Rule by Deer Park Management for failing to adopt and implement reasonably designed compliance policies and procedures relating to the valuation of fund assets.
Deer Park Management is a prominent private fund manager in the mortgage-backed securities space that manages more than $2.5 billion in assets. It was established in 2003 by Michael Craig-Scheckman and is registered with the Securities and Exchange Commission. On its website, Deer Park Road Management said its investment approach and philosophy is to focus on opportunities throughout the entire credit spectrum, moving away from overvalued sectors and into undervalued sectors.
Deer Park primarily focuses on investments in distressed securities, according to its disclosed investment strategy. Deer Park sought to buy deeply discounted, high-yielding residential mortgage-backed securities for the STS Partners’ fund, a Delaware limited partnership and the flagship fund managed by Deer Park.
The order contends that from at least October 2012 through December 2015 Deer Park’s policies failed to address sufficiently how to conform the firm’s valuations with generally accepted accounting principles, and also failed to have policies that addressed the risk that its traders were undervaluing securities and selling for a profit when needed. It also stated that the firm failed to guard against its traders providing inaccurate information to a pricing vendor and then using the prices it got back to value bonds.
The release states that Burg, who was the chief investment officer, oversaw the valuation of certain assets in the flagship fund and approved valuations that the traders flagged as “undervalued” with notations to “mark up gradually.” The SEC also stated that the committee overseeing valuation was composed of the principal’s relatives and others without relevant expertise.
Deer Park Road Management consented to censure, and Deer Park Road and Burg agreed to cease and desist from committing or causing any violations and future violations of a provision of the Investment Act requiring reasonably designated policies and procedures.
The Steamboat Pilot & Today reached out to Deer Park Road Management Co., and got a response from Kevin Fitzgerald of Gashalter & Co., a public relations and communications firm working for Deer Park Road Management, that the firm declined to comment on the order of the fines by the SEC.