SEC charges GP waived his own capital-call obligation

  • Blackstreet agrees to $3.1 mln SEC settlement
  • Used fund assets to make political, charitable contributions
  • GP waived capital call obligation after secondary

Here’s an interesting way to do a private equity secondary.

Murry Gunty, managing partner at Blackstreet Capital Management, acquired interests in his firm’s second fund from eight limited partners through a vehicle he controlled and then waived his obligation to meet future capital calls, the Securities and Exchange Commission charged.

Gunty, whose Chevy Chase, Maryland, firm also used fund assets to make political and charitable contributions, failed to disclose the waivers to the rest of the Fund II LP base, the agency said. Gunty acquired the fund stakes from two defaulting LPs, and six investors who wanted to sell.

The Fund II limited-partner agreement makes clear that those who buy fund interests from other LPs take on future capital-call obligations, according to the SEC, which on Wednesday announced a settlement with Gunty and Blackstreet.

While Gunty did not participate in gains from new investments, his absence from future capital calls increased the pro-rata share of capital calls shouldered by remaining LPs in the fund, the SEC said.

Blackstreet and Gunty agreed to pay $3.1 million to settle several SEC charges, the agency said Wednesday. Gunty and Blackstreet did not admit or deny wrongdoing.

The settlement includes a censure of Blackstreet, and the firm and Gunty agreed to disgorge about $2.3 million, which includes $504,588 reimbursed to LPs. Gunty and Blackstreet also agreed to pay $283,737 in interest and a $500,000 penalty.

“The firm is pleased to be able to put this matter behind us, and we look forward to continuing to work diligently in managing our current investments and on delivering great returns for our investors,” said Don Meyer, a spokesman for Blackstreet. He declined to answer additional questions.

The SEC’s investigation kicked off from an examination of the firm, the agency said. Blackstreet, which focuses on underperforming divisions within larger companies, raised two funds and has $156.3 million in assets under management, the SEC said.

Gunty formed the firm, which was formerly known as MMP Capital Management and changed its name to Blackstreet in 2007.

The SEC found several violations, including Blackstreet collecting at least $1.8 million in broker fees without being registered as a broker; and charging fees in exchange for senior-level management and operating services to portfolio companies, without disclosing the ability to collect such fees in the fund LPA.

Blackstreet also used fund assets to pay for political and charitable contributions and entertainment expenses, the SEC said. The firm also acquired a departing employee’s incentive-based shares in portfolio companies without disclosing or getting consent from fund LPs.

The SEC gave credit to several efforts by the firm to fix the issues, including hiring a compliance consultant in 2012, stopping charging fees for senior-level management services, and reimbursing LPs.

“Private equity fund advisers must manage their funds in accordance with the governing documents,” said Anthony Kelly, chief of the SEC Enforcement Division’s Asset Management Unit, in a statement.

Action Item: The SEC complaint:

Photo: Andrew Ceresney (right), director of the SEC Enforcement Division, speaks as Preet Bharara, U.S. attorney for the Southern District of New York, looks on during a news conference on May 19, 2016. Reuters/Brendan McDermid