SEC Charges Private Equity Firm for Collecting Undisclosed Due Diligence Fees
The SEC charged a private equity firm and its principal with fraud and breach of fiduciary duty related to paying sham due diligence fees that ultimately flowed back to the firm. The SEC alleges that the firm did not disclose that it would pay due diligence fees and then it paid more than $9 Million in such fees to firms that did not conduct due diligence but then remitted the money back to the private equity firm. When the fund’s auditors could not get adequate documentation about the due diligence fees, the audit firm reported the respondents to the SEC. The SEC asserts that the firm forged paperwork and lied in an effort to conceal the fake due diligence fees. The SEC also states that the firm did not cooperate with the SEC’s examination, often cancelling meetings and failing to produce requested documentation. The respondent firm registered with the SEC in September 2012, presumably as a result of the Dodd-Frank Act.
OUR TAKE: It may be unclear whether the firm properly disclosed the due diligence fees or whether the payee actually performed due diligence services. However, the firm did not help its cause by stonewalling the auditors and the SEC. Perhaps, rather than facing an enforcement case, a more cooperative and transparent firm may have ultimately concluded these issues with an obligation to disgorge undisclosed compensation and enhance disclosure.