SEC Says Fund Firm Used Third Party Parking Scheme to Avoid Affiliate Transaction Prohibitions
The SEC has commenced enforcement proceedings against a private equity firm and its principals for concealing a prohibited related party transaction by parking the investment at a third party. The SEC alleges that the firm, which managed timber-related investments, sold a piece of property out of one of its funds at the direction of the fund’s sole client, an ERISA plan. The SEC alleges that the firm sold the property to a third party with the understanding that another of its funds would repurchase the property at a profit. The SEC says that the entire round-trip took approximately two months. The SEC charges that the firm engaged the third party to circumvent affiliate transactions rules that prohibited a direct transaction between the two funds. The SEC named the firm as well as its CEO, CIO, COO, and CCO.
OUR TAKE: Somebody thought he was being very smart by using the third party to launder the investment. Instead, this scheme just made it easier for the SEC to prove the firm’s intention to violate the securities laws. Private equity firms need to re-assess any contemplated affiliate transactions.