1. The Core Legal Principle

Under accounting and securities law:

A. Accounting: IFRS 13 / Ind AS 113 / ASC 820 Fair Value
Hierarchy: Level 1 (quoted price) > Level 2 (observable) > Level 3 (model). If you use an external valuer / broker quote / pricing service, that is your evidence. If you override it, you must:

1. Demonstrate the external price is not representative of fair value
2. Document the alternative assumptions, inputs, and why they are better
3. Get independent approval (Valuation Committee / Board)

SA 540 (Auditing Accounting Estimates) says auditor must evaluate management bias and whether management's override of third-party pricing is reasonable and documented.

B. Fiduciary Law: Duty of Care and Loyalty
A director, trustee, investment adviser who commissions an independent valuation and then discards it without documented rationale is deemed to have acted on self-interest or gross negligence. The override is presumed to be self-serving.

The SEC penalized a valuation process failure, not a valuation error.

2. When Does Override Become Illegal?

1. Principal transactions: You sell assets you own to clients/funds you manage. You must determine fair market value. Using par minus fees instead of market price is fraud if not documented.
2. NAV manipulation: Mutual funds / AIFs overriding third-party prices to smooth NAV.
3. Related party M&A: Controlling shareholder forcing company to buy its subsidiary at inflated value, overriding external fairness opinion.
4. Tax / Regulatory filings: Rejecting registered valuer's report without recording reasons.

3. Detailed Case Laws

Category A: US SEC - Investment Advisers & Funds

1. SEC v. Private Fund Adviser - Feb 25, 2026 Enforcement Action (2026 Settlement)
This is the most recent and direct precedent.

Adviser sold loans from its own balance sheet to private funds it advised during COVID market dislocation. Advisory agreements required trades at fair market value.

Violation: Firm priced transfers using a mechanical formula — par value less unamortized fees — without reassessing whether it was fair value after market crashed.

SEC finding: RIA violated fiduciary duties by failing to reasonably determine fair market value when selling loans to affiliated private funds. Lack of fair value determination was contrary to disclosures.

Sanction: $5 million + interest reimbursement, censure. Key learning: Voluntary reimbursement did not absolve process failure. You must document: Why external broker quotes were rejected, what alternative evidence used, who approved.

2. SEC v. Morgan Asset Management - Mutual Fund Valuation (2008, Rule 38a-1)
By using valuations provided by broker-dealers or a third-party pricing service instead of transaction prices, the adviser caused funds to not follow their own written valuation procedures. As a result SEC found adviser aided and abetted violation of Rule 38a-1.

Principle: If your policy says "we use independent pricing service, overrides need valuation committee approval with written rationale", failure to document override = violation even if final price is arguably fair.

3. SEC v. KPMG - Oil & Gas Reserves Audit Failure
KPMG agreed to pay more than $6.2 million to settle SEC charges that it failed to properly audit fair valuations of unproven reserves. Allegations included misuse of industry expert reports on reserves, inadequate testing of assumptions.

Principle for auditors: Cannot just file external expert report. Must document evaluation of expert's assumptions and why management's override of expert was accepted/rejected.

Category B: Delaware Fiduciary Duty

4. In re Southern Peru Copper Corp. Stockholder Litig., Del. Ch. 2011 - $1.263 Billion Judgment
The Delaware Chancery Court held controlling stockholder breached fiduciary duty when it forced publicly traded company to pay for controlling stockholder's subsidiary. This decision represents the largest judgment in Delaware history.

Facts: Grupo Mexico (controlling shareholder) sold Minera Mexico to Southern Peru (90% controlled). Special committee hired Goldman Sachs for valuation. Goldman gave valuation, but board overrode it with internal optimistic projections to justify higher price, without documenting why external valuation was wrong.

Chancellor Strine: Even relatively serious disclosure deficiencies and large difference between transaction price and judicially appraised price prove substantive unfairness. Court drew adverse inference because board failed to create documentary record.

5. Ryan v. Lyondell Chemical Co. - Delaware Duty to Create Record
Chancery Court denied summary judgment for directors. Holding: Boards need to create the documentary record of actions taken in response to acquisition proposals and follow deliberate process and establish thorough record of deliberation.

If you override external valuation in M&A, you must have board minutes detailing rationale, comparable analysis, and fairness opinion consideration.

Category C: Indian Law - Tax and Regulatory Valuation

6. M/s. Innoviti Payment Solutions Pvt Ltd v. ITO, ITAT Bangalore
AO rejected valuation report u/s 56(2)(viib). Tribunal held: AO has authority to examine valuation report and, if not satisfied with assessee's explanation, he must record the reasons and rationale for rejecting the valuation report.

Principle now in law: Rejection without recorded reasons = unsustainable. Same applies in reverse - if assessee/management rejects external valuer, they must record reasons.

7. Chief Controlling Revenue Officer v. P. Babu - Supreme Court of India
Special Deputy Collector revised market values to Rs. 10,36,937 and Rs. 51,16,600 without providing reasons. Supreme Court concurred that Registering Officer must provide reasons for considering documents undervalued. Absence of such reasons renders proceedings legally unsustainable.

Applied to SEBI: If valuation agency (e.g., mutual fund valuation policy) says use VWAP or external agency, any deviation must be with documented rationale - seen in IL&FS case.

8. SEBI v. ICRA, CARE, India Ratings - IL&FS Case (Dec 26, 2019)
SEBI slapped Rs. 25 lakh fine each for lethargic indifference. Rating agencies failed in conducting independent professional assessment. They relied on management representation instead of documenting why external market signals (rising debt-equity, default of group companies) were overridden.

Invesco Mutual Fund deviation note for Roadstar InvIT (IL&FS asset) also shows this: AMC stated "due to rationale mentioned below did not consider said price and continued to value units at Rs. 50.49 which is a deviation from Valuation Policy" - SEBI required such rationale to be disclosed on website under Principles of Fair Valuation in Eighth Schedule.

9. Swadeshi Polytex Ltd v. DCIT, ITAT Delhi
ITAT Delhi held failure to call for DVO report and discrediting valuation report of assessee without substantial reasons is unsustainable. When onus is on party to prove fact by valuation report, you cannot override without counter-evidence.

4. Consequences of Non-Documentation

• Adverse inference: Court will assume override was for improper purpose. In Southern Peru, court assumed worst.
• SEC: Negligence-based fraud: Recent SEC orders show scrutiny focuses not only on whether valuations are incorrect, but also on whether firms follow stated methodologies, appropriately oversee third-party pricing, constrain management discretion, and maintain records supporting decisions.
• Audit qualification: SA 540 violation.
• SEBI MF Regulation: Valuation deviation beyond threshold without disclosure on website = violation of SEBI Circular on Fair Valuation.
• Tax: Addition under 56(2)(viib) / 56(2)(x) struck down if AO fails to record reasons, but if taxpayer overrides without reasons, addition sustained.

5. Compliant Override Framework

To override legally, you must document contemporaneously:

1. What: External price, source, date, e.g., "CRISIL valuation Rs.100"
2. Why override triggered: e.g., "stale price, trade in thin market, corporate action"
3. Alternative evidence: e.g., two broker quotes, DCF with assumptions
4. Who: Valuation committee minutes, independent director approval
5. Disclosure: Note to investors / auditors / exchange

Valuation judgments should be supportable, documented, tested against available market evidence and accurately reflected in investor disclosures