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Private equity transactions are not outside the scope of
enforcement by the Securities and Exchange Commission. The SEC filed a case
against a former principal of an investment adviser that manages private equity
funds. The charge is that he "usurped ...[a] lucrative investment opportunity in
a private company." At this point, the SEC has only filed for a cease and
desist order and has not proven the allegations against Matthew Crisp.
Crisp worked for Adams Street Partners, a private
equity firm registered with the SEC as an investment adviser. In 2006 and 2007,
Adams Street was looking at investing in TicketsNow. Crisp was assigned as the
lead sponsor of the possible investment. They decided to go ahead, but the
investment was greater that their typical investment amount so Crisp decided to
syndicate a portion of the committed investment.
Crisp decided to create his own investment fund and take
a portion of the syndication. Adams Street contends that Crisp was not
authorized to syndicate the investment to his own fund. He also increased the
size of his fund's allocation.
The SEC contends that the resulting decrease in the size
of the Adams Street's collective investment in TicketsNow was a
misappropriation of a lucrative investment opportunity that should have gone to
Adams Street. The SEC alleges that Crisp did not disclose his involvement to
Adams Street. That would include failing to report the involvement on his
periodic compliance disclosures. Failure to disclose such information was a
violation of the Adam Street's fiduciary duties and of it's policies.
It turned out to be a good investment because TicketsNow
was sold to a competitor a year later.The investment tripled their invested
The SEC alleges that this was not a single instance of
malfeasance. They claim that Crisp tried again with an investment in Sherman's
Travel. He took a syndication in that investment in his own investment fund.
Adams Street discovered the problem and, after conducting
an internal investigation, terminated Crisp. Thy also took the next step and
self-reported the matter to the SEC.
The SEC alleges that Crisp violated Sections 206(1),
206(2), and 206(4) of the Advisers Act. They extend this through Rule 206(4)-8
which prohibits fraudulent activity by advisers to pooled investment vehicles
with respect to investors or prospective investors.
In the alternative, the SEC contends that Crisp aided and
abetted Adams Street's violation of Sections 206(1), 206(2), and 206(4) of the
Advisers Act, extended through Rule 206(4)-8.
Further, the SEC alleges that pursuant to the actions
outlined above, Crisp willfully violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The cease and desist proceeding is being instituted to
determine whether the allegations noted are true and what remedial action is
appropriate. Crisp already returned a large portion of his returns to Adams
As more private equity fund managers are going to be
registered with SEC in the next six months, I found this case to be an
interesting example of SEC enforcement in the industry. Assuming that Crisp
actually did what the SEC alleges, such activity should be a violation of the
firm's conduct policy and a violation of it's funds' partnership agreements.
Investors generally will impose a contractual obligation on the fund manager to
not divert investment opportunities to employees and principals of the fund
So how does SEC enforcement help in this area? I suppose
it adds the scare factor of a government investigation on top of losing your
job and professional reputation.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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