Private Equity Manager Diluted Existing Investors
A private equity manager was barred from the industry in part for diluting investors’ interest without their consent. According to the SEC, the respondent needed cash to satisfy a loan arising from personal expenses borrowed from the fund. The SEC alleges that the respondent recruited additional investors that were promised a preferential dividend that was dilutive to existing investors. The Operating Agreement required the unanimous consent of existing investors to admit new investors, but the SEC avers that the respondent intentionally circumvented this requirement by creating a shell structure. The SEC also charges the respondent with looting the funds for his own personal expenses.
OUR TAKE: Private fund managers should ensure that they review their operating agreements, many of which were drafted before Dodd-Frank.