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SEC sues KCAP Financial’s fund executives for overstating assets

The US Securities and Exchange Commission (SEC) has charged three executives of KCAP Financial, for overvaluing fund’s asset portfolio, including corporate debt securities and investments in collateralized loan obligations (CLOs), during the 2008 financial crisis.

KCAP CEO Dayl Pearson and chief investment officer R Corless were responsible for calculating the fair value of debt securities, while its former CFO Michael Wirth was accountable for calculating the fair value of CLOs.

The accused did not consider certain market-based activity when determining the fair value of its debt securities and certain CLOs, and thus failed to comply with generally accepted accounting principles (GAAP) and in particular FAS 157.
SEC Enforcement Division associate director Antonia Chion said, "When market conditions change, funds and other entities must properly take into account those changed conditions in fair valuing their assets."

The market regulator claims that KCAP’s overvaluation and internal controls failures breached the reporting, books and records, and internal controls provisions of the US federal securities laws.

Pearson and Wirth have agreed to pay individually $50,000 in fine and Corless will pay $25,000 penalty to settle the SEC’s charges, without admitting or denying the charges.