Lincolnshire Management has consented to pay $2.3 million to the Securities and Exchange Commission to settle charges alleging improper expense allocations involving two of its funds’ investments in the same company. The New York-based private equity firm, which is run by businessman T.J. Maloney, claims to oversee $1.7 billion.
Lincolnshire acquired PCS Inc. via its debut fund. Several years later it acquired Computer Technology Solutions with the intention of merging the two. However, reports Forbes.com, the first fund ran out of money, so Lincolnshire used its second fund to pay for the acquisition.
Commingling investments can be precarious, especially as each fund had a slightly different investor base. Because of this, the firm created expense allocation policies that were paid directly to it. This meant that each company’s allocation would be determined by the percentage of respective contributions to the total revenue of the overall revenue. However, the policies were never put in writing, which sometimes led to misallocations.
According to the SEC’s administrative order, Lincolnshire regarded Computer Technology Solutions and Peripheral Computer Support as one company that belonged to both funds. However, contends the regulator, from 2005 to 2013, the private equity firm directed more of the costs on the latter, which hurt the Lincolnshire fund that owned the company.
The agency is accusing Lincolnshire Management of breaching its fiduciary duty to the private equity funds when it properly benefited one over the other by misallocating the costs. The private equity firm is settling the SEC charges without denying or admitting to the alleged wrongdoing.
Previously in 2011, investors sued the Lincolnshire Management, claiming it got around paying them distributions by wrongfully taking out expenses and fees and interest related to a $99 million legal victory obtained by Lincolnshire portfolio entities. The trustee of the Acconci Trust claims that Maloney and the firm stole millions from the Lincolnshire Equity fund, with Maloney keeping $7.6 million from the judgment against Cendant Corp. Investors of the Lincolnshire Fund had expected an approximately $60 million distribution but received just $45 million.
Maloney sent investors a letter explaining that the firm and he were charging litigation costs and interest. The Acconci Trust also accused Lincolnshire of self-dealing. That securities fraud case has yet to be resolved.
The SEC has been looking into conflicts of interest and hidden fees at private equity funds. Due to the big fees that may be involved, disputes may arise between private equity firms and their clients.
Our securities lawyers represent high net worth individuals and institutions seeking to recover their securities fraud losses. Contact The SSEK Partners Group today to request your free case consultation. One of our private equity fund fraud attorneys can help you explore your legal options.
T.J. Maloney’s Private Equity Firm Pays $2.3 Million To Settle SEC Charges, Forbes, September 22, 2014
SEC Charges New York-Based Private Equity Fund Adviser With Misallocation Of Portfolio Company Expenses, SEC.gov, September 22, 2014
Read the SEC Order (PDF)
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