Senior SEC Enforcement Official Expects More Cases against Private Equity Firms
In a recent speech, the Chief of the SEC Enforcement Division’s Asset Management Unit, Bruce Karpati, indicated that the SEC will increase the number of enforcement cases it brings against private equity firms. He said that private equity has “unique characteristics that make the industry more susceptible to fraud,” citing recent cases involving usurpation of investment opportunities, misallocation of expenses, misrepresentations about portfolio companies, and misuse of confidential information. He stressed the importance of implementing a compliance program that includes representation in the firm’s decision-making processes. He said that the SEC is concerned about conflicts of interest such as shifting expenses from the management company to the funds (including using buying power to get a better deal for the management company from law firms and auditors), charging unwarranted fees to portfolio companies, misallocating broken deal expenses and organizational expenses, and misrepresentations about portfolio company valuation during fundraising.
OUR TAKE: The SEC (through statements made by Enforcement, Investment Management, and OCIE) has put the private equity industry on notice that the examiners are coming and that they will refer matters to enforcement. The SEC has been unusually detailed and specific in describing the practices that it intends to scrutinize.