SEC Hits Evergreen with Charges over Mortgage Fund Valuations

The Securities and Exchange Commission (SEC) on Monday charged Boston-based Evergreen Investment Management Company with securities law violations for overstating the value of a mutual fund that invested primarily in mortgage-backed securities.

An SEC news release said Evergreen also only selectively told shareholders about the fund’s valuation problems. The Massachusetts Securities Division also brought related charges against Evergreen Monday.

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. The money includes compensation for shareholders, penalties, and disgorgement of ill-gotten gains.

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 was inflated by as much as 17% due to Evergreen’s improper valuation practices. Had Evergreen properly valued the fund, it would have ranked near the bottom of its category rather than as a consistent high performer in 2007 and 2008, the SEC found.

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

“By picking and choosing to disclose negative information to some investors and not others, Evergreen gave certain shareholders an unfair advantage and left others in the dark,” said David Bergers, director of the SEC’s Boston Regional Office, in the release. “Evergreen harmed investors and prevented them from making informed decisions by overstating the value of its holdings in mortgage-backed securities.”

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. 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 SEC said.

More information is available here.