Lack of Compliance Infrastructure Costs Private Equity Firm and Principals

The SEC fined a private equity firm and its principals, and barred the former CFO/CCO from the industry, for engaging in multiple conflicts of interest transactions with the funds.  According to the SEC, prohibited transactions included (i) borrowing from the funds, (ii) failing to make capital contributions, and (iii) using false bookkeeping adjustments to hide transactions.  The transactions violated the LPA and were not properly disclosed in capital call notices or financial statements.  In addition to anti-fraud and books and records violations, the SEC charged violations of the compliance rule (206(4)-7) because the compliance manual did not address conflicts of interest including control by the two principals and related party transactions.  As part of the settlement, the firm hired a new CCO, a new general counsel, a new CFO, and an independent compliance consultant.

OUR TAKE: Hiring a competent CCO before the SEC arrived would likely have avoided the enforcement action and the resulting damage to the firm’s business and reputation.  It appears that the principals had no sensitivity to the regulatory environment in which they were operating.