SEC Charges Private Equity Fund Manager with Misallocation of Expenses

clean energy capital

In the presence exam initiative, the Securities and Exchange Commission identified conflicts of interest as a high risk area. Included in that high risk area is the allocation of fees and expenses. The SEC just brought charges against a private equity fund manager for the improper allocation of fees and expenses.

The SEC charged Scott A. Brittenham and his company, Clean Energy Capital LLC, with paying more than $3 million of the firm’s expenses from its funds. Brittenham did not consent to the order, so I can only rely on the SEC’s view of the facts.

The SEC order states that the $3 million in expenses was primarily employee compensation and office expenses for Clean Energy Capital. That includes executive bonuses, health benefits, retirement benefits and rent. The SEC goes for the kitchen sink when it also mentions “group photos, legal fees for estate planning maintenance costs on CEC’s offices, CEC checks and letterheads, office and mobile telephone, bottled water, office lunches, car washes and insurance, holiday cards, CEC’s registration expenses, and business cards, and charges relating to transporting Brittenham’s daughter to and from school.”

Theoretically, a fund manager could charge these expenses to the fund if properly disclosed. (I doubt investors would line up to invest in such a fund.) But the Clean Energy Capital funds did not disclose these expenses. The limited partnership agreements described the expenses to be borne by the funds as “reasonable” partnership expenses “related to the acquisition or disposition of securities.”

The SEC charges that CEC treated all of its funds equally when it came to the expense reimbursement. However, that means that CEC did not make an effort to allocate the actual expense to the fund that benefited.

On top of the alleged improper allocation, CEC was making loans to the funds because they had insufficient cash reserves to pay their expenses. The SEC claims the interest rate on these internal loans ranged from 11.86% to 17.38%. That’s a high rate in this low interest rate environment.

The SEC order goes on to describe other alleged compliance failures, including violation of the custody rule, lying about the GP investment amount, and failure to disclose previous disciplinary actions.



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