Private Fund Managers Accused of Triple-Dipping
The SEC commenced enforcement proceedings against a private equity fund sponsor that it accuses of engaging in conflicted transactions without disclosure or consent.
The SEC charges the defendants, including a state-registered adviser, of causing the funds they managed of (i) investing in companies that the principals controlled or had interests in, (ii) engaging fund service providers in which the principals retained an interest, and (iii) investing in companies that engaged the services of entities in which the principals had an interest. The SEC faults the defendants for failing to submit conflicted transactions to an LP advisory board as promised in the disclosure documents. The SEC also pleads that the defendants lied about the security of investments and overvalued assets.
You can’t run a private fund as a personal piggy bank where you get paid to manage the fund, then charge the fund to provide ancillary services, and then also charge the portfolio companies. While the SEC does make a point that conflicted transactions should be approved by an independent LP committee, we’re not confident that you can launder all conflicted transactions (such as these) with LP approval. As a fiduciary, you have to put investors first.
Read complaint here.