San Francisco-based Van Wagoner Capital Management, which once scored soaring returns thanks to bets on tech firms, has had miserable performance since the tech bubble burst. As returns suffered, investors pulled their money out of the company’s funds.

Now things could get worse. The fund company has disclosed in an SEC filing that the regulator is poised to start enforcement proceedings against it. At issue is Van Wagoner’s alleged failure to properly value certain private holdings in its funds.

According to the filing, it could face unspecified civil and administrative actions. Also facing possible actions are a firm employee, a director and two past directors.

Van Wagoner said in the filing that it opposes the SEC staff’s recommendation of enforcement action.

At the heart of the issue is how Van Wagoner assigns values to securities that are not publicly traded. Back in 2001, The Wall Street Journal pointed out that the company had not lowered the valuation of many of the private shares it owned, even though the tech sector was in a swoon. Shareholder lawsuits ensued and are still working their way through the courts.

Such episodes are rare in the fund industry, which is seen as more transparent than hedge funds and certain other investments. However, in 2000, Heartland Advisors was forced to drastically reduce the net asset values of three bond funds because it had overvalued them.

These kinds of stories should serve to remind advisers and their clients that no mutual fund should be trusted blindly.

"One of the primary things clients pay us to do is doubt for them," said Ken Clark, president of Charis Financial, in Laguna Niguel, Calif. "When we trust, we stop asking the hard questions."

Furthermore, he said, it’s hard to feel pity for advisers or investors who entrusted money to Van Wagoner. Founded in 1995, the company offered great bull-market returns but a very short track record. That should have been a big red flag, said Clark.

In late 2000, Van Wagoner’s assets under management totaled about $2 billion. They now stand at about $250 million.


Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.