DOJ Warns Private Markets Over Creative Valuations

The Department of Justice has officially joined the chorus of voices expressing concern about valuation practices in private markets, marking a significant escalation in regulatory attention. Jay Clayton, the head of the DOJ’s Manhattan office, explicitly stated that ‘there are definitely some areas of concern for me in private markets’ during a recent interview. This declaration from one of Wall Street’s top prosecutors comes as market participants and academics have been increasingly flagging what Clayton described as ‘stark divergences’ in how competing firms value private assets within their portfolios.

The growing scrutiny reflects fundamental concerns about transparency and consistency in an asset class that has traditionally operated with less regulatory oversight than public markets. Clayton’s warning represents a clear signal that the era of leniency toward private market valuations may be ending, with both financial regulators and the Justice Department now actively monitoring these practices. This coordinated approach suggests that valuation discrepancies that were once considered industry norms may now face legal challenges and enforcement actions.

At the heart of the DOJ’s concern are what Clayton termed ‘stark divergences’ in how different firms value identical or similar private assets. These discrepancies have become increasingly apparent as private markets have grown in size and complexity, with some firms appearing to employ what Clayton characterized as ‘creative’ approaches to their numbers. The lack of standardized valuation methodologies across the private markets has created an environment where similar assets can be valued dramatically differently by competing firms.

These valuation practices have drawn attention from multiple quarters, including market participants who must navigate these inconsistencies and academics studying market transparency. The problem is particularly acute in sectors where illiquid assets dominate and market prices are not readily available, creating opportunities for what regulators may view as overly optimistic or strategically timed valuations. The DOJ’s involvement suggests that some of these practices may cross the line from aggressive accounting to potentially unlawful conduct.

Clayton’s warning carries significant weight for private market participants, as he made clear that ‘people should know that the financial regulators and the department are looking at those’ concerning valuation practices. This represents a direct message to private equity firms, venture capital funds, and other private market players that their valuation methodologies are now under formal scrutiny. The involvement of both financial regulators and the Justice Department indicates that potential consequences could range from regulatory sanctions to criminal investigations.

The increased regulatory attention comes at a critical time for private markets, which have seen explosive growth in recent years. As Bloomberg News Chief Wall Street Correspondent Sridhar Natarajan discussed on Bloomberg Businessweek Daily with hosts Carol Massar and Tim Stenovec, the valuation issues in private markets have become too significant for regulators to ignore. The DOJ’s public statement suggests that enforcement actions may be forthcoming, potentially forcing a industry-wide reassessment of valuation practices and bringing greater standardization to how private assets are priced and reported.