The SEC fined and barred from the industry the principal of a purported private equity firm for looting one fund to pay another by inflating the valuation of an underlying security transferred between the funds. The SEC pleads that the defendant transferred a worthless interest in a start-up company to one of the funds and then had another fund buy that interest at a $2.8 Million valuation in order to pay off investors in the transferring fund. The SEC contends that the defendant failed to (i) properly value the security with third-party input, (ii) disclose the inherent conflicts of interest and (iii) comply with statements made in the offering memorandum. Neither the fund manager nor the principal were registered in any capacity, but the SEC was able to uncover the wrongdoing as a result of litigation brought by the Colorado Division of Securities.
OUR TAKE: The state securities regulators serve a valuable function ferreting out fraud and other wrongdoing by firms that fail to register with the SEC and might otherwise go undetected.