Valuation risk is a key focal point for hedge fund investors and regulators because manager compensation flows directly from the value of portfolio assets and managers typically control or at least significantly influence the valuation process.  In short, managers often hold significant sway over the primary input into their compensation – an arrangement rife with opportunities for conflicts of interest.  As such, hedge fund investors typically dedicate material due diligence time to understanding a manager’s valuation policies and procedures and identifying valuation risk.  See “Amber Partners White Paper Highlights Key Due Diligence Points for Hedge Fund Investors Evaluating Hedge Fund Portfolio Composition and Valuation,” Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2012).  Similarly, the Securities and Exchange Commission (SEC) considers asset valuation a key enforcement priority and has targeted market manipulation and other tactics used to artificially inflate asset values.  Recently, the SEC charged two investment advisers and their sole owner for allegedly engaging in practices designed to artificially inflate the value of a large position in the hedge fund they managed.  This article summarizes the factual allegations, causes of action and requested remedies as outlined in the SEC’s complaint.