SEC Says At Least 200 Private-Equity Firms Imposed Bogus Fees

According to the US Securities and Exchange Commission, over half of the approximately private-equity firms that it examined have charged unjustified expenses and fees to investors without their knowledge. The regulator’s findings are from its review of the $3.5 trillion industry.

It was the 2010 Dodd-Frank Act that gave the SEC more oversight over money managers, which allowed the agency to scrutinize some firms for the very first time. By the end of 2012, examiners had discovered that certain advisers were wrongly collecting money from companies included in their portfolio, improperly calculating fees, and using assets from the funds to pay for their own expenses. Bloomberg reports that a source in the know about the regulator’s findings said that while some of the issues seem to stem from mistakes, others might have been intentional.

SEC to Look Even More Closely At Private Funds
Per Dodd-Frank, the majority of private equity and hedge funds that are large or midsized have to register with the SEC. A lot of them hold illiquid and complex investments that are tougher to value than the ones at more conventional asset managers. They also can have complex fee structures that can be more difficult for investors to comprehend.

Now, reports Reuters, the SEC has set up a group to look more closely at both. The team will examine the way they disclose fees, value assets, and communicate with investors.

Private-Equity Firms
Private-equity firms use debt and investor capital to buy companies that they will then take public or sell for profit. Annual management fees are usually 1.5 – 2% of committed funds and the firms usually keep 15-20% of investment profits, which is also called carried interest. A lot of buyout firms will charge fees to the companies they obtain to help pay for related expenses, with investors sometimes getting part of the proceeds.

Unfortunately, according to some critics, abuse by private-equity firms can happen because these organizations tend to be so “opaque.” Managers get wide discretion and this can make it hard for investors to know what is going on.

In March, the SEC filed a securities case against Clean Energy Capital LLC and Scott Brittenham, who founded the firm, for allegedly misusing over $3 million to cover office rent, group photography sessions, bottled water, and tuition. The regulator says that investors should have gotten the money instead. The legal representation from Brittenham and Clean Energy Capital maintains that his clients thought the expenses were allowed under Delaware law and limited agreements.

If you are an investor who suspects you suffered losses because your financial representative engaged in negligence or misconduct, contact our securities lawyers today.

Exclusive: SEC forms squad to examine private funds – sources, Reuters, April 7, 2014

Bogus Private-Equity Fees Said Found at 200 Firms by SEC, Bloomberg, April 7, 2014

Detroit Reaches Settlement With Some Bond Insurers, The Wall Street Journal, April 9, 2014

Read the SEC Order Against Clean Energy Capital

More Blog Posts:
SEC Accuses Private Equity Manager of $9M Securities Fraud, Institutional Investor Securities Blog, January 30, 2014

Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010