Friday, June 22, 2007

Allied Capital Settles with the SEC

Business development and private lending company Allied Capital Corp. settled an administrative action with the SEC related to maintaining records for the valuation of the company's investments in the securities of other corporations.  According to the administrative order (here):

From the quarter ended June 30, 2001 through the quarter ended March 31, 2003, Allied violated recordkeeping and internal controls provisions of the federal securities laws relating to the valuation of certain securities in its private finance portfolio for which market quotations were not readily available. During the relevant period, Allied failed to make and keep books, records, and accounts which, in reasonable detail, supported or accurately and fairly reflected certain valuations it recorded on a quarterly basis for some of its securities. In addition, Allied’s internal controls failed to provide reasonable assurances that Allied would value these securities in accordance with generally accepted accounting principles. Further, from the quarter ended June 30, 2001 through the quarter ended March 31, 2002, Allied failed to provide reasonable assurances that the recorded accountability for certain securities in its private finance portfolio was compared with existing fair value of those same securities at reasonable intervals by failing to: (a) provide its board of directors ("Board") with sufficient contemporaneous valuation documentation during Allied’s March and September quarterly valuation processes; and (b) maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that had gone into bankruptcy.

The settlement did not require the payment of a civil penalty or any sanctions, only than that Allied Capital continue to employ a chief valuation officer and independent valuation consultants.  The company has been involved in a long-term battle with a hedge fund regarding the valuation of its assets, and its most recent 10-Q (here) discusses a grand jury investigation of possible pretexting by an agent to obtain telephone records of the hedge fund manager:

In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company’s management has stated that these allegations are not true. The Company is cooperating fully with the inquiry by the United States Attorney’s office.

Hewlett-Packard learned its pretexting message the hard way, and the course of this investigation remains to be seen. (ph)

Civil Enforcement, Securities | Permalink

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