REIT Manager Overpaid Itself When Calculating Incentive Fee
A large REIT manager, together with its CEO and CFO, agreed to pay over $60 Million in disgorgement, interest and penalties for inflating incentive fees and taking reimbursement for significant expenses. The SEC asserted that the defendants, contrary to disclosures and agreements, used their insider positions to calculate incentive fees in a manner that unjustly enriched themselves over the investors to whom they owed a fiduciary duty. The SEC also charged the defendants with collecting millions in expense reimbursements as part of various merger transactions. The SEC accused the defendants of securities fraud and falsifying books and records.
Firms should use some third party (e.g. fund administrator, LPA committee) to calculate, or at least confirm calculations, of fees collected from clients. When management can exercise arithmetic discretion to pay itself, regulators will scrutinize the calculations.