Evergreen now faces a $40+ million fine from the SEC over its fallen ultra short bond fund. On Monday, the regulatory agency unveiled charges related to Evergreen's Ultra Short Opportunities Fund, for which the Boston-based fund firm (now part of the Wells Fargo empire) has agreed to pay $33 million to compensate fund shareholders and $7 million in disgorgement and penalties.

According to the SEC, Evergreen first overstated the value of the fund by up to 17 percent (thanks to some mortgage-backed securities), and then only told select investors about the valuation problems. Evergreen has neither confirmed or denied the findings of the SEC order, and the investigation is ongoing.

Evergreen began to address the problem of the overstated value by re-pricing some of the holdings, the SEC claimed. However, the SEC says Evergreen only told select shareholders about the reasons for the re-pricing, and these investors were then able to cash out before their shares lost value. This left the other investors to bear the burden when the value dropped. Evergreen then closed the Ultra Fund in June 2008 after many investors redeemed their shares.

This is not the first legal flak Evergreen's faced over Ultra Short Opportunities, which closed and liquidated a year ago (see MFWire, 6/20/2008). Stoltmann Law Offices filed a Finra arbitration claim over the fund in July 2008, and Abraham, Fruchter & Twersky followed with a lawsuit in August (see MFWire, 7/9/2009 and 8/5/2008).

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Company Press Release

Washington, D.C., June 8, 2008 – The Securities and Exchange Commission today charged Boston-based Evergreen Investment Management Company LLC and an affiliate with securities law violations for overstating the value of a mutual fund that invested primarily in mortgage-backed securities, and then only selectively telling shareholders about the fund’s valuation problems.

Evergreen agreed to pay more than $40 million to settle the SEC’s charges without admitting or denying the findings in the SEC’s order. This enforcement action is the result of the joint efforts of the SEC and the Massachusetts Securities Division, which also brought related charges against the Evergreen entities today.

The SEC’s enforcement action against Evergreen’s investment advisory arm and its distributor, Evergreen Investment Services, Inc., found that the value of its Ultra Short Opportunities Fund, which was consistently ranked as a high performer in its class in 2007 and 2008, was inflated by as much as 17 percent due to Evergreen’s improper valuation practices. Had Evergreen properly valued the fund, it would have ranked near the bottom of its category during this time, the SEC found.

According to the SEC’s order, when Evergreen began to address the fund’s overstated value by re-pricing certain holdings, it only disclosed the reasons and the likelihood for additional re-pricings to select shareholders, who were then able to cash out before incurring any additional drop in the value of their fund shares. Meanwhile, other shareholders were left uninformed.

“By picking and choosing to disclose negative information to some investors and not others, Evergreen gave certain shareholders an unfair advantage and left others in the dark,” said David P. Bergers, Director of the SEC’s Boston Regional Office. “Evergreen harmed investors and prevented them from making informed decisions by overstating the value of its holdings in mortgage-backed securities.”

The SEC’s order found that Evergreen overstated the fund’s value by failing to properly take into account readily available information about certain mortgage-backed securities in the valuation process. The fund’s portfolio management team also withheld negative information about certain of the fund’s securities from an Evergreen committee responsible for valuations. Evergreen closed the Ultra Fund in June 2008 in the wake of substantial redemptions by fund shareholders following the firm’s re-pricing of the fund’s holdings.

The two Evergreen entities agreed to pay $33 million to compensate fund shareholders as well as penalties totaling $4 million and disgorgement of ill-gotten gains of approximately $3 million. All of the money will be distributed to Ultra Fund shareholders pursuant to the provisions of the SEC’s Order. The Evergreen entities also were censured and ordered to cease and desist from any further violations of certain federal securities laws.

The SEC’s order took into account the remedial acts and cooperation of the Evergreen adviser and distributor.

The SEC acknowledges the assistance of Secretary of the Commonwealth of Massachusetts William F. Galvin and the Massachusetts Securities Division in its investigation. The SEC’s investigation is ongoing. 

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