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SEC Wallops Large Private Equity Firm with $52.7 Million in Penalties

tie and cash

A large private equity firm agreed to pay $52.7 Million in fines, disgorgement, and interest for failing to properly disclose the acceleration of portfolio monitoring fees and certain affiliated loan interest accruals and failing to prevent the reimbursement of unauthorized personal expenses.  Although the respondent disclosed that it would receive portfolio monitoring fees, the SEC faults the firm for failing to disclose its practice of accelerating such fees upon sale or IPO until after the commitment of capital and receipt of fees.  The SEC also maintains the firm failed to properly disclose interest allocations for certain intercompany loans.  The SEC also asserts that the firm’s weak compliance program allowed a senior partner to harm the funds by obtaining reimbursement for unauthorized personal expenses, which ultimately led to his separation from the firm.    The SEC’s Enforcement Director, Andrew J. Ceresney, chided the private equity industry: “A common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors.”

OUR TAKE: The SEC continues its enforcement campaign against the private equity industry, notching another 8-figure case.  The only real defense is to hire or retain professional compli-pros, conduct a thorough compliance review, and implement a state-of-the-art compliance infrastructure that compares favorably with the traditional asset management industry, which has been subject to the compliance rule since 2005.

https://www.sec.gov/litigation/admin/2016/ia-4493.pdf