Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, June 8, 2009

SEC & Massachusetts Settle Charges That Evergreen Overstated Value of Fund

The SECC settled charges that Boston-based Evergreen Investment Management Company LLC and an affiliate overstated the value of a mutual fund that invested primarily in mortgage-backed securities, and then only selectively told shareholders about the fund’s valuation problems.  Evergreen agreed to pay more than $40 million to settle the SEC’s charges without admitting or denying the findings in the SEC’s order. This enforcement action is the result of the joint efforts of the SEC and the Massachusetts Securities Division, which also brought related charges against the Evergreen entities today.

The SEC’s enforcement action against Evergreen’s investment advisory arm and its distributor, Evergreen Investment Services, Inc., found that the value of its Ultra Short Opportunities Fund, which was consistently ranked as a high performer in its class in 2007 and 2008, was inflated by as much as 17 percent due to Evergreen’s improper valuation practices. Had Evergreen properly valued the fund, it would have ranked near the bottom of its category during this time, the SEC found.

According to the SEC’s order, when Evergreen began to address the fund’s overstated value by re-pricing certain holdings, it only disclosed the reasons and the likelihood for additional re-pricings to select shareholders, who were then able to cash out before incurring any additional drop in the value of their fund shares. Meanwhile, other shareholders were left uninformed.

The SEC’s order found that Evergreen overstated the fund’s value by failing to properly take into account readily available information about certain mortgage-backed securities in the valuation process. The fund’s portfolio management team also withheld negative information about certain of the fund's securities from an Evergreen committee responsible for valuations. Evergreen closed the Ultra Fund in June 2008 in the wake of substantial redemptions by fund shareholders following the firm’s re-pricing of the fund’s holdings.

The two Evergreen entities agreed to pay $33 million to compensate fund shareholders as well as penalties totaling $4 million and disgorgement of ill-gotten gains of approximately $3 million. All of the money will be distributed to Ultra Fund shareholders pursuant to the provisions of the SEC’s Order. The Evergreen entities also were censured and ordered to cease and desist from any further violations of certain federal securities laws.

The SEC’s order took into account the remedial acts and cooperation of the Evergreen adviser and distributor.

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