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Industry Not Immune From Bad Behavior: SEC Records

In a Jan. 23 speech at a conference hosted by Private Equity International, Bruce Karpati, the chief of the SEC enforcement division’s asset management unit, summarized eight recent enforcement actions to illustrate how the commission has been bringing more private-equity cases. Firms involved include such well-known names as buyout giant TPG Capital (the firm itself was not implicated) and business development company KCAP Financial Inc., previously called Kohlberg Capital Corp. Below is a brief rundown on five of these cases; for each I tried to reach the party or parties accused of impropriety but unless otherwise noted was not successful.

  1. The SEC last February accused the late Robert Pinkas, then 58, of misappropriating $173,000 from a private-equity fund he managed to defend himself in an unrelated commission investigation, according to an SEC order. (Pinkas “made material misrepresentations” to investors in Brantley Partners IV LP by telling them he was entitled to use the fund to make the payment, the SEC said.) Pinkas then allegedly misappropriated $632,000 from the same fund to cover the disgorgement he agreed to as part of a settlement in the other investigation. The other investigation involved the “overvaluation of portfolio investments” while Pinkas was CEO of business development company Brantley Capital Corp., according to the SEC. Pinkas died last March, before the SEC held hearings on the accusations.
  2. In a November civil complaint, the SEC accused Joseph J. Hennessy, along with an investment adviser that he co-owned, Resources Planning Group Inc., of participating in a “fraudulent scheme” to raise money from investors in private-equity fund Midwest Opportunity Fund LLC. All told, Hennessy, 51 at the time, and Resources Planning Group raised at least $6.9 million from investors, much of it through promissory notes that he had personally guaranteed. While the fund was earmarked for investments in small to medium-sized companies and did acquire three companies between 2005 and 2007, Hennessy inappropriately used money raised from later investors to pay interest to early noteholders, according to the complaint. All three companies ended up in receivership. The SEC in its complaint asked that the defendants “disgorge their ill-gotten gains” plus interest, including $641,408 used to pay off interest due to early investors, and impose “an appropriate civil penalty.” Reached by phone, James L. Kopecky, an attorney for the firm, said: “My response would be that Resources Planning Group caters only to experienced investors. It didn’t defraud anybody. And it intends to defend the [SEC] action.” According to Kopecky, Hennessy no longer works at the firm, but his brother, Terry Hennessy, remains an executive there.
  3. In an April 2010 complaint the SEC accused Roy Dixon Jr., 46 at the time, and his private-equity firm, Onyx Capital Advisors LLC, with defrauding three Detroit-area public pension funds. The three funds invested $23.8 million in the fund Onyx Capital Advisory Fund I LP; according to the complaint, Dixon and Onyx Capital misappropriated more than $3 million from the fund, including more than $2 million in excess management fees, while also making “false and misleading statements” to investors during and after fund marketing. Dixon, the SEC alleged, used the misappropriated money to “pay personal and business expenses.” The SEC asked the court to require the defendants to “disgorge their ill-gotten gains and pay prejudgment interest and civil penalties.”
  4. In February 2011 a former associate at TPG Capital, Vinayak S. Gowrish, was found liable for participating in an insider trading ring. A federal jury in the Northern District of California found that Gowrish had tipped to a friend material, non-public information regarding negotiations by TPG to acquire three separate companies—Sabre Holdings Corp., TXU Corp. (now called Energy Future Holdings) and Alliance Data Systems Corp. Those trading on the information, the SEC said, made about $375,000 in “illicit profits.”
  5. In November the SEC settled with three executives of KCAP Financial Inc.and the firm itself after accusing them of overstating the value of portfolio companies in financial statements. (The firm is no longer affiliated with private-equity firm Kohlberg & Co., which used to have a signficant stake in the firm, according to a spokeswoman for KCAP Financial.) The three executives—Dayl W. Pearson, 57 at the time and president and CEO; Michael I. Wirth, 54 at the time and CFO although he has since left the company; and R. Jonathan Corless, 60 at the time and CIO—did not admit nor deny wrongdoing as part of the settlement. Both Pearson and Wirth were ordered to pay $50,000 each in civil penalties while Corless was ordered to pay $25,000. The day the settlement was announced, KCAP Financial issued a statement in which Pearson said: “In 2010, we augmented our investment valuation methodology and procedures to, among other things, ensure that we take into account market-based activity, including during times of extreme market conditions, and we are pleased that this settlement allows us to put this legacy issue behind us.”

Given these allegations, I’m feeling a little better that Congress made the right call in requiring many buyout shops to register with the SEC.