Dual-Hat Principal/CCO Fleeced the Fund for Personal Expenses and Loan
The SEC fined and barred from the industry the principal of a private equity fund for charging the fund unauthorized personal expenses and borrowing. The principal, who also dual-hatted as the firm’s Chief Compliance Officer, charged cancelled plane tickets to the fund and took a direct loan from the fund despite protests from employees. The Limited Partnership Agreement did in fact allow the reimbursement of legitimate travel expenses, but not falsified plane tickets. The loan was uncovered in the fund’s financial statements.
The dual-hat CCO model – where a non-regulatory C-suite executive also serves as CCO – doesn’t work and increases firm risk. Not only does the dual-hat exec lack the time and expertise to serve as CCO, the dual-hat structure precludes any supervision of the all-powerful exec, thereby leaving him/her to engage in wrongdoing, even where others might object. The dual-hat model also exposes the firm to an existential threat where, as here, the SEC bars the principal from the industry. We routinely advise our institutional and mutual fund clients to avoid any money manager that fails to engage an independent and fully-committed Chief Compliance Officer either by hiring a full-time employee or engaging a compliance outsourcing firm.