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$800 Million Hedge Fund Discloses SEC Scrutiny

Date: Thursday, August 26, 2010
Author: Nathan Vardi, Forbes

Yorkville Advisors, the Jersey City, N.J. hedge fund firm that recently reported $864 million of assets under management, has disclosed to investors that it provided information to the Securities & Exchange Commission at the direction of securities regulators.

According to the 2009 audited financials for YA Global Investments, Yorkville Advisors’ main fund, the SEC directed the hedge fund firm in August 2009 to “supply certain information” regarding Yorkville Advisors and YA Global Investments. Yorkville Advisors has complied with the request, the audited financials that Forbes obtained say.

YA Global Investments does not specify in its financial statements what kind of information the SEC was seeking, saying only that the activities of hedge funds and their managers have been subject to increasing regulation and oversight.

Yorkville Advisors, founded by 38-year-old Mark Angelo in 2001, is one of the largest hedge fund firms specializing in investing in thinly-traded and often illiquid outfits by making private investments in public equities, also known as PIPEs. The hedge fund firm reported nearly $1 billion in assets as recently as 2008. Angelo’s variation on PIPEs is a structured product called a standby equity distribution agreement, which like most PIPEs often causes the stock of the company receiving the investment to drop because it results in Yorkville’s funds collecting discounted shares.

A report prepared by Sagient Research’s PlacementTracker shows that Yorkville has entered into $762 million in PIPE deals since 2001, causing the underlying stocks to drop 38% on average in the first year. Most of those investments were made by Yorkville’s Cornell Capital Partners, which later changed its name to YA Global Investments.

YA Global Investments reported a total return of 6.04% in 2009 and 6.22% in 2008, its financial statements say. It reported a net investment loss of 0.09% in 2009 and net investment income of 5.43% in 2008.

According to the one-page independent auditor’s report prepared on August 13 by McGladrey & Pullen, YA Global Investments’ consolidated financial statements include investments valued at $804 million, representing 94% of its partners’ capital plus the amounts due to certain Yorkville special purpose vehicles,  “whose fair values have been estimated” by Yorkville Advisors “in the absence of readily ascertainable fair values.”

The estimated fair values for which prices are not readily available “may not reflect amounts that could be realized upon immediate sale, nor amounts that ultimately may be realized,” says a note in YA Global Investments’ consolidated financial statements. The $804 million of assets for which Yorkville Advisors has estimated fair value “may differ significantly from the values that would have been used had a ready market for the securities existed and the differences could be material,” the financial statements say. Those estimates may require “significant management judgment or estimation,” say the financial statements.

Yorkville Advisors declined to comment after canceling a scheduled call Tuesday to answer questions about its annual financial statements.

In connection with investor redemption requests it could not meet in 2008, Yorkville Advisors restructured its hedge fund operations, creating special purpose vehicles and giving redeeming investors the option of receiving securities in-kind or ownership in the SPVs. The SPVs were distributed pro-rata participation interests in YA Global Investments’ securities. The plan has been for the SPVs to get cash distributions as YA Global Investments liquidates its assets and for the SPVs to pay out its members.

Over the last year or so Yorkville has continued to make investments, focusing on the shipping sector and reaching financing agreements with companies like Oceanfreight and Top Ships. It has also struck deals with companies like RAIT Financial Trust, Ashford Hospitality Trust and Lotus Pharmaceuticals.

Yorkville has also continued to earn fees, according to YA Global Investments’ financial report. In 2009 Yorkville Advisors earned $3.8 million in connection with negotiating and facilitating the terms of various investments made by its funds. It also earned 2% on the aggregate capital accounts of its U.S. feeder fund, or $2.5 million in 2009.