The Securities and Exchange Commission today charged a Bellevue, Wash.-based investment advisory firm and its CEO with fraudulently inflating the values of investments in the portfolio of a private fund they advised so they could attain unearned management fees. The SEC also charged the fund’s outside auditors with performing a deficient audit that enabled the firm to send misleading financial statements to investors.
Chris Yoo and his firm Summit Asset Strategies Investment Management agreed to settle the fraud charges arising from Summit Stable Value Fund. Yoo and another of his advisory firms Summit Asset Strategies Wealth Management agreed to settle fraud charges related to his failure to inform clients that Summit Asset Strategies Wealth Management received significant fees when referring them to invest in the fund.
“Yoo manipulated the value of certain fund assets to manufacture millions of dollars in illusory profits that he used to line his pockets with fees he did not truly earn. He also failed to disclose a conflict of interest involving his other firm,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.
According to the SEC’s complaint filed in U.S. District Court for the Western District of Washington:
- Yoo and Summit Asset Strategies Investment Management were entitled to withdraw as compensation Summit Stable Value Fund’s net profits, which were calculated by determining realized and unrealized gains and losses. They also were required to return any excess net profits to the fund as determined in an annual audit.
- Beginning in 2011, Yoo directed the firm to withdraw purported fees that were based on fraudulently inflated investment values or were otherwise disproportionate from the fund’s actual profits.
- As part of the scheme, Yoo falsely claimed that the fund owned a specific bank asset that had appreciated to approximately $2 million in value. In reality, the fund owned an entirely different asset that was worth less than $200,000. As a result of Yoo’s false claim, the fund’s 2013 financial statements materially overstated the fund’s investment values.
- In total, Yoo and Summit Asset Strategies Investment Management withdrew nearly $900,000 in purported fees to which they were not entitled.
Without admitting or denying the allegations, Yoo and Summit Asset Strategies Investment Management agreed to pay disgorgement of $889,301 plus prejudgment interest of $104,632 and a penalty of $150,000; and Summit Asset Strategies Wealth Management agreed to pay disgorgement of $81,729.14 plus prejudgment interest of $6,611.75 and a penalty of $100,000. Yoo also agreed to be barred from the securities industry.
According to the SEC’s order instituting a settled administrative proceeding against the Summit Stable Value Fund’s external auditors Raymon Holmdahl and Kanako Matsumoto:
- They did not adhere to generally accepted auditing standards and performed a deficient audit of the fund’s 2013 financial statements, which materially overstated the fund’s valuation and ownership interest in certain assets.
- Although the auditors recognized that Yoo’s valuations posed a significant risk to the proper presentation of the fund’s financial statements, they failed to obtain sufficient appropriate audit evidence with respect to the existence of certain fund assets. Therefore, they failed to discover that the fund did not own the assets claimed by Yoo.
“Holmdahl and Matsumoto did not uncover the fraudulent activity because they failed to properly verify the fund’s assets despite having reason to question Yoo’s valuations,” said Erin E. Schneider, Associate Director for Enforcement in the SEC’s San Francisco Regional Office.
Holmdahl and Matsumoto agreed to settle the charges without admitting or denying the findings by agreeing to be suspended for three years from practicing as an accountant on behalf of any publicly-traded company or other entity regulated by the SEC.
The SEC’s investigation was conducted by Jennifer J. Lee of the Asset Management Unit in the San Francisco Regional Office with assistance from Michael Foley. The SEC examination that led to the investigation was conducted by Kenneth Schneider and Christine Pelham of the San Francisco office’s investment adviser/investment company examination program.