Articles Posted in Private Equity

SEC Examines the Private Equity Industry

Published on: February 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has started to take a broad look at the private equity industry, which until now hasn’t been subjected to much regulatory scrutiny. The industry consists of several thousand firms with over $1 trillion in assets under management. Now, the federal agency wants to know more about these financial firms’ business practices.

According to the New York Times, the Commission’s enforcement unit has sent a letter to a number of private equity funds as part of its informal look. The SEC, however, has been quick to stress that none of the firms are suspected of any wrongdoing and that it merely wants more information to be able to look into possible securities law violations. For example, the Commission wants to examine whether some private equity funds are overstating their portfolios’ value to bring in investors for future funds. Regulators also want to know about the ways in which private equity companies value investments and report performance.

The SEC’s inquiry is being conducted by its Asset Management enforcement division, which has been taking more aggressive actions to eliminate misconduct in the financial industry. At a private equity conference last month, the division’s co-chief Robert B. Kaplan talked about the need for more oversight over the industry.

Bloomberg.com reports that according to a person that knows about the inquiry, so far, it is the smaller private equity companies that are being scrutinized while some of the largest companies, including privately trading ones, are, for now, being overlooked. For example, Blackstone Group LLP, which is the largest private equity company, didn’t receive the letter the SEC sent out in December. KKR & Co. also didn’t get the letter.

The SEC decided to take a closer look at the private equity industry after the financial crisis and firms having to mark down holdings. Since then, those demanding better regulation from the agency have called for more oversight. While the SEC is tasked with policing public securities offerings and transactions it typically hasn’t looked at areas involving private placements that don’t have to register with it and sophisticated investors. That said, the Commission has still been allowed to enforce the fiduciary duties of private equity managers to the funds.

Now, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the majority of private equity companies will need to register with the SEC by the end of next month. Some 750 advisers will have to disclose “census-like” information about employees, investors, assets under management, activities beyond fund advising, and possible conflicts of interest.

Private Equity Industry Attracts S.E.C. Scrutiny, New York Times, February 12, 2012

SEC Review of Private Equity Said to Focus on Smaller Firms, Bloomberg, February 13, 2012

Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges

Published on: December 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The trustee for the DBSI Inc. bankruptcy is suing 96 independent broker-dealers for securities fraud related to suspect tenant-in-common exchanges that were sold to investors. James Zazzali is seeking about $49 million in commissions earned.

In his securities fraud complaint, Zazzali, who is a retired Supreme Court of New Jersey justice, claims that DBSI’s TIC deals were part of a $600 million Ponzi scam. The lawsuit contends that the following companies made the most commissions from selling DBSI:

• Berthel Fisher & Company Financial Services Inc.
• QA3 Financial Corp.
• DeWaay Financial Network LLC,
• The Private Consulting Group • Questar Capital Corp.

22 of the broker-dealers named as defendants are no longer in business. Zazzali contends that the commissions were fraudulent transfers by DBSI and that due to the Ponzi nature of the enterprise, old investors benefited from funds put in by new investors. The trustee believes that the broker-dealers should return investor payments and commissions, which should be distributed to DBSI creditors.

The Securities and Exchange Commission has not filed securities fraud charges against DBSI. Other private placement issuers, such as Provident Royalties and Medical Capital Holdings, were charged by the regulator last year. Provident Royalties’ receiver sued over 40 broker-dealers this year in an effort to obtain claw-back in principal and commissions from firms that sold private placements.

TICs are a form of real estate ownership involving two or more parties with fractional interests in a property. DBSI Inc. was one of the biggest distributors and creators of the product until it defaulted on investor payments and filed for Chapter 11 bankruptcy protection in November 2008. Before then, independent broker-dealers actively sold DBSI TICs. The financial product grew in popularity in 2002 after the Internal Revenue Service issued a ruling that let investors defer capital gains on commercial real estate transaction involving property exchanges.

Related Web Resources:
Sour real estate deals land B-Ds in hot water, Investment News, December 12, 2010
Something in common: Firms that sold TICs from DBSI, Investment News, December 15, 2010
Iowa brokerages included in lawsuit, DesMoines Register, December 14, 2010
Institutional Investors Securities Blog
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Private Equity Firm Onyx Capital Advisors LLC Charged with Securities Fraud by SEC

Published on: May 13, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed securities fraud charges against the private equity firm, Onyx Capital Advisors LLC, its founder Roy Dixon Jr., and his friend Michael Farr. The agency is accusing the defendants of stealing over $3 million from three area public pension funds.

According to the SEC, Onyx Capital Advisors and Dixon raised $23.8 million from the pension funds for a start-up private equity fund that was to invest in private companies. Dixon and Farr, who controlled three of the companies that the Onyx fund had invested in, then illegally took out money that the pension funds had invested and used the cash to cover their own expenses.

While Onyx Capital and Dixon allegedly took more than $2.06 million under the guise of management fees, Farr allegedly helped divert approximately $1.05 million through the companies under his control. He is also accused of diverting part of the over $15 million that Onyx capital invested in SCM Credit LLC, Second Chance Motors, and SCM Finance LLC to 1097 Sea Jay LLC, which is another company that he controls. Farr then allegedly took money from Sea Jay, gave most of it to Dixon, and kept some for himself.

The SEC is accusing Onyx Capital and Dixon of making misleading and false statements to pension fund clients about the private equity fund and the investments they were making. The agency claims that the private equity firm and its founder violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act, and Rule 206(4)-8 thereunder. The SEC claims that Farr aided and abetted in the other two defendants’ violations of Sections 206(1) and 206(2) of the Investment Advisers Act.

Related Web Resources:
SEC charges private equity firm and money manager for defrauding Detroit-area public pension funds, SEC, April 23, 2010
Read the SEC Complaint, SEC (PDF)
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