After consenting to a $40 million fine by the Securities and Exchange Commission for inflating the value of mortgage-backed securities in its Ultra Short Opportunities Fund, Evergreen Investment Management is now being investigated by the Massachusetts Securities Division for valuations in another mutual fund and a variable annuity.

The second fund in question, the Evergreen Diversified Income Builder Fund, and the annuity also were invested in specialized mortgage-backed securities, or collateralized debt obligations. In addition, the valuations of other Evergreen funds may be faulty, the firm indicated in a letter to clients.

Massachusetts’ order against Evergreen and sub-adviser to the Ultra Short fund, subsidiary Tattersall Advisory Group, notes that the goal of the Ultra Short fund was to “provide current income consistent with preservation of capital and low principal fluctuation,” yet, even though it was marketed as investing in safe instruments, it invested in riskier mortgage- and other asset-backed securities, as well as derivatives. Many investors knew little about the Ultra Short fund, the order also said.

Starting in at least July 2007, the fixed income market began to experience pricing issues due to illiquidity in the marketplace. Rather than accept third-party vendors’ fair value pricing, in December of that year, the portfolio management team began rejecting their figures and coming up with internal values of its own. Beginning two months later in February 2008, as the market deteriorated due to lack of trading, the internal group was repeatedly forced to reprice many of the fund’s holdings to zero from earlier internal pricings of $50 to $60.

That month, in fact, one vendor stopped pricing a number of positions in the Ultra Short and other Evergreen funds. In April, the management team held an internal debate on how to properly value approximately 42 distressed securities, with one executive describing the practice as more of an art than a science.

After a series of significant reductions by pricing vendors in 15 holdings in the Ultra Short fund, and fear of massive redemptions, on June 12, management decided to call financial advisers about the fund based on assets and relationships. Evergreen did not reach its other, retail sales channels about the fund until the following day. Still, not all of the financial advisers whose clients held shares in the fund were reach, so over the course of the next few business days, the wholesaling team continued to reach out to customers.

The order concludes that “the reporting of the Ultra Short fund’s inflated NAV was a dishonest and unethical misrepresentation to investors and respondents’ supervision of investor communications was inadequate to prevent and detect the selective dissemination of material non-material information.”

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