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“Mismarking”: Developments in Valuation Fraud

As the DOJ expands its mismarking inquiries beyond stocks and bonds and into areas like private equity, recent cases illuminate the increasing need for robust internal controls designed to eliminate the incentives for an employee or manager to overvalue assets.

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One of the central business functions performed by an investment fund is the valuation of its positions. Knowing how much its investments are worth allows a fund to redeem investors at accurate levels, demonstrate performance to prospective investors, and charge an appropriate amount in fees. And while some positions can be easy to value — one need look no further than Bloomberg or the Wall Street Journal to know the going rate for, say, Apple stock — more exotic or illiquid holdings can present a challenge for even the most conscientious fund.

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