In the Order Instituting Proceedings, in which Van Wagoner and VWCM neither admit nor deny the allegations, the Commission finds that Van Wagoner and VWCM misled the Funds' shareholders about the size and value of the Funds' investments in illiquid securities (securities that were not publicly traded or could not be sold readily), which obscured the fact that the Funds' holdings in those securities exceeded the limits promised in the Funds' shareholder disclosures.
The Commission also announced actions against and settlements with: a former director of the Funds, Robert Colman, who purchased private equity securities in transactions at the same time as the Funds without first obtaining an order from the Commission permitting such joint investments; and a former private equity analyst of VWCM, Audrey L. Buchner, for prohibited, personal trading in the same public securities that the Funds also held or purchased, and omissions she made that concealed the overlap with the Funds' trading.
"Van Wagoner and his firm committed fraud by misleading mutual fund investors about an important and risky aspect of the Van Wagoner Funds' portfolio," said Helane L. Morrison, District Administrator of the SEC's San Francisco District Office. "Van Wagoner and his firm betrayed the trust that investors place in mutual fund directors and managers to report their funds' market values accurately."
Added Michael S. Dicke, Deputy Assistant District Administrator of the SEC's San Francisco District Office, "Today's separate Commission actions against Colman and Buchner confirm the Commission will continue to scrutinize personal investments by mutual fund insiders, including fund directors, especially when those investments contravene the insiders' obligations to the funds."
At the time of the misconduct by Van Wagoner and VWCM, the Funds included five publicly-sold mutual funds which invested primarily in technology stocks. From 1999 through 2001, Van Wagoner invested for the Funds in illiquid securities issued by private companies, with the hope that the investments would produce large returns when the private companies went public. However, these securities were risky to hold in large quantities because they could not be readily sold or valued based upon market quotations. To address the risks, Van Wagoner told the Funds' shareholders that he would endeavor to limit these investments to 15 percent of the value of the Funds' portfolios.
Van Wagoner and VWCM misled the Funds' shareholders about these investments in two ways.
- Van Wagoner and VWCM misled the Funds' investors about the nature of the portfolio holdings. In each annual and semi-annual report between June 1999 and June 2001, they misstated the true level of the Funds' investments in private and other illiquid securities, which exceeded the 15 percent limit. They also caused the Funds repeatedly to purchase new private, illiquid securities contrary to the Funds' disclosures that they would not buy private equity securities if the purchases put the Funds over the 15 percent limitation on illiquid securities. In addition, they mislabeled certain illiquid securities as liquid.
- Van Wagoner and VWCM misled the Funds' investors about the value of their shares, and thus the Funds' market values. During late 2000 and 2001, Van Wagoner improperly decreased the prices of the private securities, often to a value of zero, in an effort to shrink the private securities portfolio and make it appear the Funds were within the 15 percent limitation on illiquid securities. In so doing, Van Wagoner and VWCM failed to carry out the duty entrusted to them to value the securities in good faith and in accordance with the board's policies.
Van Wagoner and VWCM, which neither admit nor deny the Commission's allegations in an administrative proceeding, have agreed to cease and desist from violating the antifraud provisions of the Investment Advisers Act and the regulations under the Investment Company Act regarding the proper valuation of illiquid securities. They will also pay an $800,000 civil penalty. Under the settlement, Van Wagoner has agreed to resign from his position as president of the Funds, and not to serve as an officer or director of any mutual fund for a period of seven years. During the same seven year period, Van Wagoner also will not be making decisions regarding the Funds' liquidity or the valuation of private equity securities.
VWCM also will initiate compliance measures designed to protect against future violations. The investment adviser will hire an independent consultant who will make recommendations to improve the procedures for determining the pricing and liquidity of private equity investments.
Colman, who neither admits nor denies the Commission's allegations, has agreed to settle an administrative proceeding by paying a $25,000 civil penalty, disgorging director's fees he received between 1998 and mid-2000, plus interest, totaling $16,800, and agreeing to cease and desist from violations of the reporting and joint investments provisions of the Investment Company Act. Buchner, who neither admits nor denies the Commission's allegations, has agreed to settle an administrative proceeding by paying a $35,000 penalty and agreeing to cease and desist from violating the Commission's regulations that prohibit fund-affiliated persons from engaging in conduct that deceives a fund.
