Opinion ID: 186545
Heading Depth: 3
Heading Rank: 2

Heading: Overvaluation

Text: 38 Examining the same quarterly filings, the SEC also found that the Fund overvalued its Premier holdings. The SEC centered its analysis on the Fund's 1983 prospectus, the Fund's only public statement on valuation procedures. The prospectus endorsed four methods of valuation, none of which the Fund used to value Premier. Instead, the Fund settled on the quoted market price as Premier's value. The SEC found that, unmoored from its prospectus, the Fund used an ad hoc process that mainly consisted of rubber-stamping Calandrella's recommendations. The SEC concluded that the prospectus — and good accounting practice — would have directed a different approach: valuing restricted stock by discounting the shares from the unrestricted market price. 39 According to the SEC, standard accounting practice supports the prospectus's methodology and regards it as improper to value restricted stock at the unrestricted market value. The SEC determined that discounting would have resulted in an appreciably lower valuation. Petitioners offered no evidence of a discernible reason for choosing market price as the appropriate value. Accordingly, we find the SEC's overvaluation findings are supported by general accounting practice and the Fund's own prospectus. 40 The Fund counters that, even if it technically overvalued Premier stock, the prospectus sheds no light on the materiality of the valuation. Furthermore, it says the overvaluation, if any, caused no actual harm. Materiality, however, does not require a showing of actual harm to investors. Graham, 222 F.3d at 1001 n. 15. The SEC supported its finding of materiality, concluding that an overvaluation of the Fund's largest asset would have been significant information for potential Fund investors. In addition, as the Fund's only public statement about valuation, the prospectus does contribute to the overvaluation's materiality. Because the Fund rejected its publicly stated valuation procedures and did not discount its largest holding, substantial evidence supports the SEC's finding. 41 Citing the Fund's inconsistent and slipshod valuation methodology, the SEC found a reckless disregard for the accuracy of Premier's stock valuations. The Fund disputes the finding, claiming reliance on counsel for procedures adopted in 1994. But even if true, much of the testimony showed that the Fund used no set procedure — whether developed by counsel or not — for valuing its holdings, instead generally relying on Calandrella's recommendation to the board. Such a haphazard process for valuing the largest holding of the Fund constitutes an extreme departure from the standards of ordinary care that should have been obvious to all the Fund's directors. See Steadman, 967 F.2d at 641-42.