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Private Fund Manager Took Management Fees While Telling Investors that Fund was Illiquid

 

The SEC instituted proceedings against a private fund manager and its principals for inflating the valuation of illiquid assets and conflicts of interest.  The SEC charges that the defendants marketed a fund with the term “income” in its name even though the fund held only illiquid assets including a private company and interests in gems and minerals.  The SEC also asserts that the defendants inflated the values of the fund’s assets in order to pay their management fees while telling investors that the fund lacked liquidity to meet redemption requests.  The SEC claims that the defendants illegally paid themselves more than $13 Million in management fees.   The SEC also asserts that the principals engaged in self-dealing insider loan transactions and invested client money in their affiliated funds.

Fund sponsors claiming limited liquidity or redemption gates make want to re-consider how and when to pay management fees especially based on assets that are not publicly traded.  Also, private fund sponsors should review fund names and offering documents to make sure they remain accurate over time.