Lots of private equity funds use a line of credit to fund acquisitions. It’s quicker to draw on the line than to call equity from investors. That line of credit is secured by the capital commitments to the private equity fund. Later the private equity fund calls the capital for the acquisition and pays down the line of credit. According to a criminal complaint a private equity fund manager is accused of forging subscription documents and an audit letter to get a line of credit.
JES Global was registered with the Securities and Exchange Commission as an Exempt Reporting Adviser. Its principal, Elliot Smerling, committed blatant fraud. It may have future implication for private funds and the work that will go into setting up a credit facility.
Elliot Smerling had an empire of private equity funds and reportedly lived a lavish lifestyle, with homes in Florida, New York and Brazil with a collection of luxury cars. Smerling is accused of committing fraud to keep his complex financial operation afloat, according to the criminal charges.
He set up a credit facility with Silicon Valley Bank for one of his funds. He handed the bank two subscription agreements. One purported a $45 million commitment from a New York University endowment and a second purported to be $40 million from an investment manager. The criminal complaint did not identify the two purported investors. Smerling is also accused of submitting a forged audit letter and a falsified bank statement showing a wire transfers from the purported investors.
According to the criminal complaint, Smerling produced fake documents. The University endowment has no record of the document or the wire and the signature does not match the CIO of the endowment. The investment manager has no record of the document or the wire and the signature does not match. The audit firm named on the audit letter was not engaged by Smerling or the fund. The address on the letterhead of the audit letter is an address that the firm has not operated at for several years.
This is the first time that I’ve heard of subscription facility fraud. I expect that there may be changes to the lending process
Sources:
- Sub line market shaken by alleged fraud by Graham Bippart in Private Funds CFO
- Florida fund manager forged college investment docs to land $95 million loan, feds say
- Criminal complaint against Elliot Smerling
- SVB Financial Group 2020 Form 10-K
- SVB Financial Group Feb 26 2021 Form 8K
- JES Global Form ADV Private Fund Reporting
