Private Fund Invested in Principal’s Son’s Company
A private fund manager and its principal were fined for failing to disclose that the fund invested in companies owned by the principal’s son.
The fund, as well as separate account clients, either made loans to, or purchased convertible notes from, the affiliated companies with investments advised by the firm. The SEC asserts that the respondents failed to inform LP investors that the fund would purchase notes from the companies and that fund investment proceeds would be used to pay back the loans. The firm ultimately provided full disclosure, and the SEC did not allege that any investor lost money, although some of the notes remain outstanding. The principal, who also acted as her own Chief Compliance Officer, was barred from serving as chief compliance officer in the future. The firm was also required to retain an independent compliance consultant.
Don’t invest in affiliated companies. The SEC has consistently attacked affiliated investments, regardless of the amount of disclosure. Also, as we have advised time and again, a C-suite executive should not wear the dual hat of Chief Compliance Officer. The roles are too conflicted, and the SEC has specifically criticized dual-hatting. Either hire a full-time CCO, or retain an outsourcing firm.
Read SEC Order here.