Investors disagree on the appropriate end of day price of securities… and sometimes intensely so. Each trading day at Ten12 we see roughly 100,000 disputes between institutional investors on the end of day price of the exact same security. End of day pricing differences exist for all types of securities including common stock of companies in the S&P 500 index; however, the most significant disagreements occur with securities that trade in the Over the Counter market. Each one of these pricing differences results in one fund outperforming another fund simply because they priced the exact same security higher. As a result, traditional fund performance rankings are an apples to oranges comparison.

The vast majority of pricing differences are caused by legitimate differences in opinion with some managers being more optimistic than others. However, at a certain level optimism becomes fraud. Since Madoff’s arrest in 2008, the SEC has charged 174 funds with fraud. Investor often rely on independent pricing vendors and accountants to accurately value portfolios. However, hiring an independent pricing vendor is like joining a gym. There is no obligation to actually use the service. Also accountants in the United States will adhere to GAAP and SEC rules which clearly places the responsibility for accurate valuation on the fund manager.

Since Madoff’s arrest, 99% of investor losses due to fraud have been caused by valuation fraud. Funds that hired respected independent pricing vendors and Big 4 accounting firms have allegedly inflated security values by up to 1,600% and individual portfolios by billions of dollars.