One of the salient features of the SEC’s enforcement program in recent years has been a dearth of accounting fraud cases. While those cases used to be the SEC’s bread and butter, and hovered around 200 actions per year, they have dropped off dramatically since 2007, and hit a low of 79 last year. Only a small part of the drop is attributable to breaking out FCPA cases from the “Financial Fraud/Issuer Disclosure” category. Where have these cases gone?

It is not a complete answer by any means, but some of them may be moving to the private equity space. On March 11, the SEC demonstrated as much when it charged two investment advisers at Oppenheimer & Co. with misleading investors about the valuation policies and performance of a private equity fund they manage.  Briefly, the Oppenheimer Global Resource Private Equity Fund I (“OGR”) was invested in four investment vehicles by September 2009. One of these was Cartesian Investors A, LLC. Cartesian was formed for the purpose of purchasing shares in a Romanian government entity known as Fondul, a holding company set up to compensate citizens whose property was seized by the communist regime.

The problems came this way: From October 2009 through 2010, two investment advisers in the Oppenheimer family allegedly disseminated market, materials to prospective investors and quarterly reports to existing investors that contained material misrepresentations and omissions concerning Respondents’ valuation policies and OGR’s performance. The marketing materials, including a pitch book, said OGR’s asset values were “based on the underlying managers’ estimated values.” For Cartesian, though, that allegedly wasn’t true. Starting in October 2009, while OGR was being marketed to new investors, OGR’s portfolio manager changed Cartesian’s value, using a different valuation method than that used by Cartesian’s underlying manager. The SEC says the new numbers were a lot higher than the old numbers. Investors did not know about the change or that the new valuation method resulted in a significant increase in the value of Cartesian over that provided by Cartesian’s underlying manager.

The SEC charged Oppenheimer’s advisers with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 206(4) of the Investment Advisers Act, and Rules 206(4)-8 and 206(4)-7. The last rule requires investment advisers to have written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act, which the SEC says these advisers did not do. The advisers have undertaken to distribute over $2.2 million to OGR investors. That amount represents the management fees collected from October 2009 through September 2012 and an amount for reasonable interest.

Private equity managers should understand that their responsibilities to their investors include providing an accurate picture of their underlying assets’ true values. Saying they’re based on one set of criteria, when they are actually based on another, lower valuation, are really just accounting misconduct in slightly different form. While the SEC is going after this sort of conduct less and less with public companies, it regulates securities, and not just public companies. And private equity funds’ limited partnership interests are certainly securities.

Given the conduct described in the order, the advisers at issue may have been fortunate to escape with negligence-based charges. But such are the benefits of settling before litigation ensues. Finally, it seems worth noting that that the SEC brought this case in administrative court, and will thus avoid scrutiny of the settlement from judges in the Southern District of New York that it cannot seem to escape.