Revalued Securities Trigger SEC Investigation and Multiple Lawsuits

The adviser of two mutual funds used an independent pricing service to value certain fund securities, including illiquid and difficult-to-value securities. The valuations provided by the pricing service indicated a material drop in values that caused the net asset value of the fund to drop by double digits in a single day. This significant drop in value worried some investors and caused a sudden demand in fund redemptions, which put pressure on the fund to sell securities held by the fund. As a result, the adviser announced the appointment of a pricing committee that would revalue the securities of the two funds based on fair-value pricing procedures. Citing overall market liquidity conditions due to credit quality concerns and a lack of demand, the pricing committee re-priced the securities held by the two funds. As a result, the share prices for the funds dropped materially once again.

Subsequently, several class-action lawsuits, individual actions and an SEC investigation were launched against the two mutual funds and their adviser, alleging improper valuation of securities held by each fund. Total Cost: $12,000,000.