Private Equity Exec to Pay Nearly $1 Million for Over-Valuing Investments
The principal of a private equity firm agreed to pay over $957,000 in fines, disgorgement and interest in connection with over-valuing investment in two private companies. The SEC alleged that the firm, which was a registered investment adviser, sought to inflate its advisory fees charged to its affiliated business development company, which was registered under the Investment Company Act and was a reporting company under the Exchange Act. The SEC alleged that the firm maintained inflated values for the two investments despite substantial evidence to the contrary. Consequently, the firm misrepresented the values in financial statements, Board reports, and SEC filings.
OUR TAKE: This is a cautionary tale for private equity firms who will be required to register under the Dodd-Frank Act. The SEC is concerned about the conflict of interest inherent when firms use “optimistic” valuations that ultimately affect fee calculations and performance reporting.