Real Estate Fund Sponsor Forced to Cancel Equity to Settle SEC Charges
To settle an SEC enforcement action, a real estate developer agreed to cancel his $9 Million equity interest and pay over $1.5 Million in disgorgement, fines and interest. The respondent undertook to invest personal assets in the real estate development project and maintained the $9 Million interest. However, the SEC alleges that the respondent funded his equity investment with investor proceeds described as a “proprietary equity credit fee.” The SEC also charges that the developer diverted other assets without full and complete disclosure.
It is unusual for the SEC to require a private fund sponsor to cancel its equity interest as a remedy in an enforcement action. The SEC did not allege that the respondent stole the money, only that he mischaracterized the nature of his investment as his own personal funds, which, the SEC argued, induced others to invest. The lesson of this case is not to get too clever with how you disclose any payments that benefit insiders.
Read the SEC Order here.