In the Matter of KCAP Financial Inc., Dayl W. Pearson, Michael I. Wirth, CPA and R. Jonathan Corless, Admin. Proc. No. 3-15109.  On November 28, 2012, the SEC announced the filing of a settled Administrative Order finding that KCAP Financial Inc. and its executives Dayl Pearson, Michael Wirth and Jonathan Corless did not properly account for the value of certain market-based activity in determining the fair value of investments in collateralized loan obligations (“CLOs”).  The Order also finds that KCAP did not disclose that it had valued its two largest CLO investments at cost.  CEO Pearson and chief investment officer Corless were responsible for calculating the fair value of KCAP’s debt securities, while KCAP’s former CFO Wirth had primary responsibility for calculating the fair value of KCAP’s CLOs. 

The SEC announced that the case represents the SEC’s first enforcement action against a public company for not properly valuing its assets according to the applicable financial accounting standard — FAS 157 — which became effective for KCAP in the first quarter of 2008.  The Administrative Order finds that KCAP did not record and report the fair value of its assets in accordance with Generally Accepted Accounting Principles and in particular FAS 157, which requires assets to be fair valued based on an “exit price” that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Without admitting or denying the charges, KCAP and its executives agreed to the SEC Order finding they violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  The Order also finds that Pearson, Corless, and Wirth caused KCAP’s violations and directly violated Exchange Act Rule 13b2-1 by causing KCAP’s books and records to be falsified. Pearson and Wirth also directly violated Exchange Act Rule 13a-14 by falsely certifying the adequacy of KCAP’s internal controls.  Pearson and Wirth each agreed to pay $50,000 penalties and Corless agreed to pay a $25,000 penalty to settle the SEC’s charges.  The Order also requires KCAP and the executives to cease and desist from committing or causing any violations or any future violations of these federal securities laws.