SEC Sues Private Equity Fund-of-Funds Manager for Marketing Target Returns
The SEC commenced securities fraud proceedings against a private equity fund-of-fund manager for marketing target returns without a sufficient basis. The SEC says that the firm’s marketing materials claimed that the investment would yield a “7-10x Return on Capital Raise Investment.” The SEC asserts that the respondent had no basis to support these claims because: (i) neither the fund nor its personnel had any history delivering significant returns, (ii) most of the principals’ investment experience resulted in failure, and (iii) the firm was already in a precarious financial position. The SEC also alleges various other marketing misrepresentations, breach of fiduciary duty, and misappropriating client assets.
OUR TAKE: Don’t use target returns in marketing materials. The SEC heavily scrutinizes return assumptions as insufficiently supportable.