Published on Jan 22nd, 2025 |

Improper Private Fund Expenses | Managers and Owner Charged

SEC RELEASES

Introduction

The SEC settled charges against two (2) Fund Managers and the Sole Owner for expenses charged to their Private Funds. The SEC stated that a breach of their fiduciary duty occurred.

Fund documents typically explain the type of expenses that are allowed to be charged by Fund Managers.

These actions resulted in fines and penalties of approximately $250,000.

What Happened?

According to the SEC:

  • From 2019 through December 2023, the two (2) Fund Managers and the Sole Owner charged their Funds for expenses not permitted under the governing documents, failed to disclose any conflicts of interest, and/or submitted invoices to the Funds without reasonably assessing if such invoices should be paid by the Fund.
  • Examples of inappropriate expenses included Outsourced Financial Services, Public Relations Services, and Legal Fees.
  • Over a Million dollars were paid for by the Funds for Outsourced Financial Services to the Managers.
  • Over $200,000 in Fees for strategic communication and Public Relations Services provided to the Managers were charged to the Funds starting in 2022.
  • In both situations, these expenses were initially paid for by the Managers but during the relevant period the Managers began charging the Funds without any change to the governing documents or a disclosure to investors.
  • Of the approximately $91,000 in Legal Fees charged to the funds, $70,000 was for legal work on behalf of the Manager, not the Fund.
  • Also, during the relevant period, invoices were submitted and reimbursed by the Fund for vague expenses such as “various expenses”, “expense reimbursement”, or “due to managing Co.”. There were no records that would distinguish between personal expenses and proper expenses.
  • Corporate Credit Cards were used by family members of the owner without any documentation that would ensure that personal expenses were not being charged to the Funds. While many expenses were used for legitimate business purposes, there was evidence that personal trips were also charged.
  • An accrued unpaid balance owed by the Funds to the Manager of over one (1) Million dollars was eliminated as part of the settlement.
  • The hiring of a Forensic Accounting Firm by the Fund Manager, and the results provided to SEC investigators played a role in the amount charged by the SEC as it aided in expediting the investigation.

Vigilant's Conclusion

Vigilant’s Conclusion

It is important that Fund Managers provide proper documentation for expenses charged to their Funds.

A proper compliance program, with policies and procedures designed to catch improper expense charges, is an important aspect of any successful business in this industry. Compliance Training is very important to have performed periodically for personnel as well.

Vigilant provides Compliance Services for a variety of Private Funds (Private Equity, Hedge Funds, Real Estate, Private Credit, Venture Capital, Co-Investments, Fund of Funds) that are tailored to the needs of your business.

Schedule a call with Vigilant by clicking the button below to learn more about our Outsourced Compliance Services.

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