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PE Firm Pays $3.4 Million for Broken Deal Expenses Paid Since 2004

A private equity firm agreed to pay over $3.4 Million to settle charges that it failed to allocate broken deal expenses to co-investment funds as far back as 2004.  The private equity funds reimbursed the respondent for broken deal expenses including costs incurred to develop, negotiate, and structure potential transactions that were never consummated.  The SEC faults the firm, which registered in 2012, for failing to disclose that the funds would pay the broken deal expenses allocable to co-investment vehicles utilized by insiders.  The SEC asserts violations of the Advisers Act’s antifraud provision (206(2)) and the compliance rule (206(4)-7) for failing to implement a written compliance policy or procedure governing broken deal expense allocation practices.

OUR TAKE: The SEC reaches all the way back to 2004 to calculate disgorgement even though the firm did not register until 2012.  Private fund firms that registered in 2012 should re-examine their expense allocation practices for years prior to 2012 and consider LP reimbursement before the SEC brings a public enforcement case.

https://www.sec.gov/litigation/admin/2017/ia-4772.pdf

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