Private Fund Theft Through Diligence Payments

camelot and compliance

The Securities and Exchange Commission charged Lawrence E. Penn III and his firm Camelot Acquisitions Secondary Opportunities Management, a private equity manager, with stealing $9 million from investors in their private equity fund. He is accused of siphoning off $9.3 million through sham due diligence payments.

The SEC claims that Penn used a shell company to funnel due diligence expense payments from the private equity funds. That money was then transferred to Penn and Camelot. Penn and Camelot are merely charged so we can only see the issue through the SEC’s eyes. Since it was a private equity fund, the story caught my eye.

Camelot’s audit firm could not obtain satisfactory evidence that certain due diligence payments were legitimate. The fund only paid millions in due diligence expenses to a firm called Ssecurion. But no other firm for due diligence.That;s strange for a firm to be using a single diligence provider given the many areas of diligence required for private equity investments.

Another red flag should have been the cost. I think $9 million is a big expense item for a fund with about $175 million AUM.

The audit firm kept poking and Camelot produced generic looking materials that could be found on the internet. None were branded or had any indication that they came from Ssecurion. The audit firm was worried and didn’t have any credible evidence that the costs were legitimate.

The audit firm reported the matter to the Securities and Exchange Commission.  The SEC’s Office of Compliance and Inspections and Examinations initiated a for-cause exam. Camelot failed to produce requested books and records and Penn failed to show up for several meetings. As a result, OCIE could not complete the examination and handed the case over to enforcement.

Camelot’s Form ADV Part 2 states Deloitte and Touche terminated the audit relationship during the summer of 2013. Deloitte disowns prior financial statements and did not prepare a report for 2012.

It sounds like a great job by Deloitte reporting the problem. Except it took the firm a few years and a few audits to uncover the problem. Alleged problem. Penn and Camelot have not responded to the charges.


Gustave Doré’s illustration of Lord Alfred Tennyson’s “Idylls of the King”, 1868