Augustine Capital Management did many things wrong while managing its Augustine Fund. One highlight or the misdeeds is using fund assets to make conflicting transactions without notifying investors.
The fund charged the salaries of two principals, Thomas F. Duszynski and John T. Porter, as fund operating expenses. According to the fund documents, the management fee was supposed to compensate Augustine for its “overhead and expenses in managing the Partnership.” The manager could charge “operating expenses” to the Fund, a term defined by the PPM to include communication costs, brokerage commissions, legal, accounting, and auditing fees. The fund documents did state that the Fund would pay salaries, healthcare, or rent for the manager. But they made the Fund pay for it anyhow.
It’s not that a manager is not allowed to charge those expenses to the fund. It just has to be disclosed to investors so they know what they are paying for.
In the same light, you need to disclose your investments to the fund investors. Augustine chose to hide a related-party transaction. Augustine had made an investment in FT Investing. However, Duszynski and Porter held an interest in FT. Then they bought out the Fund’s investment in FT at a loss. After the sale, they had the Fund make $600,000 in loans to FT, with no documentation. Duszynski and Porter’s original ownership in FT had been funded by a loan from the Fund.
Nothing in the Fund documents allowed personal loans to the management company or its employees/owners. The Fund had no board of advisors or other mechanism to approve of the related-party transactions. They failed to accurately describe the transactions to Fund investors.
Augustine Fund formerly held an investment in FT Investing, LLC. This investment was liquidated in December 2013. When the original investment was made, the Fund also made an interest-bearing loan to one of its co-investors in FT Investing. This loan is on track to be fully repaid on its maturity date in December 2014.
This description was misleading because it did not reflect the conflict with the loan: that the loan was made to Duszynski, a principal of the fund manager. Additionally, it misrepresented the loan’s repayment status, because Duszynski had not begun repaying the loan.
“Reasonable investors would have considered it important both that the Fund’s monies were used to make a substantial personal loan to a director of the general partner without the investors’ consent, and that the director defaulted on the loan.”