SEC censures VSS over disclosure in secondary deal

  • Why is this important: The SEC has been monitoring secondaries for conflicts of interest and disclosure violations
  • Stevenson, VSS agree to pay $200,000 civil penalty
  • SEC censures VSS
  • Agency investigated secondary involving equity Fund III
  • Investor Relations Contact: Lacey Mehran at +1 212-381-8455 or

Jeffrey Stevenson, head of Veronis Suhler Stevenson, and the firm settled with the SEC over lack of disclosure of rising valuations on assets he purchased in a secondary transaction out of one of the firm’s older funds.

Stevenson and VSS failed to inform selling LPs that the value of the fund in which they were considering selling interests was likely going up, the SEC said in its settlement document.

The rising valuation might have caused selling LPs to hold the assets rather than sell at the potentially lower valuation.

The SEC censured VSS; and Stevenson and the firm agreed to pay a civil penalty of a total of $200,000. The firm and Stevenson did not admit or deny the findings.

SEC area of focus

This may be the first time the SEC has brought charges involving a secondary transaction. It’s an area of the industry that the agency for the past few years has been monitoring for conflicts of interest and disclosure violations.

Judith Burns, spokeswoman with the SEC, did not respond to a request for comment.

“VSS is pleased to have reached a resolution with the [SEC] and to put this inquiry behind us,” the firm said in a statement.

The case involved a 2015 secondary transaction in which Stevenson bought interests from limited partners in the firm’s third fund, which closed on $1 billion in 1999.

Stevenson based the price he paid on a net asset value of Dec. 31, 2014, the agency said.

Fund III had two remaining portfolio companies when LPs requested liquidity options to close out the pool, sources told Buyouts in past interviews.

VSS considered simply liquidating the fund and distributing private shares in the two remaining investments to LPs at a value of $33.9 million, which represented the net asset value as of Dec. 31, 2014, the SEC order said. At the time, the LP capital account held about $6.8 million in value, after total distributions of around $1.36 billion from the fund, SEC said.

Stevenson simultaneously considered buying out LPs for cash at 100 percent of the Dec. 31, 2014 net asset value, SEC said.

VSS sent a letter informing LPs of the fund-liquidation proposal and Stevenson’s offer on April 28, 2015, SEC said. The letter stated that the two remaining portfolio companies’ 2014 Ebitda had declined from their 2013 Ebitda and also that VSS took part in failed discussions to sell one of the companies, SEC said.

The letter also said that “given their current prospects, in our view, it is unlikely that these businesses will be sold in the near future,” SEC said.

A majority of Fund III LPs accepted Stevenson’s cash offer, though some LPs wanted to remain in Fund III or for VSS to sell assets to a third party, SEC said.

VSS, in early May 2015, received preliminary information showing Fund III valuations had a material increase from 2014 NAV, representing a potential total increase of about $1.74 million in LP interests in the fund, SEC said. The preliminary results also showed both companies’ Ebitda in the first quarter increasing over their fourth-quarter Ebitda, SEC said.

Despite these potential changes to Fund III valuation, a letter dated May 15, 2015, with the secondary offer did not inform Fund III LPs of the potential material increase to the third pool’s valuation, the SEC said. Stevenson discussed the offer with several LPs without mentioning the potential rising results, the SEC said.

“VSS’s and Stevenson’s failure to include this information in connection with the May 2015 offer represented a material omission that caused statements in the May 15, 2015 letter to be misleading,” SEC said.

Additionally, VSS did not disclose the first-quarter financials or a reason for their delay to the 15 remaining LPs in Fund III as of the end of May, as it was required to do by the LP agreement, the SEC said. In fact, first-quarter 2015 financials were never finalized and VSS never sent the financials to any Fund III investor, SEC said.

“We have agreed to pay $200,000 to settle a case involving a May 2015 transaction in which we provided LPs an option to sell their LP interests at 100 percent of the 2014 year-end audited NAV in a fund in its seventeenth year with $6.8 million in remaining NAV after having returned $1.36 billion,” VSS said in the statement.

“VSS is committed to upholding the highest standards in all that we do and we remain dedicated to continually enhancing our practices.”

Other deals

VSS restructured several of its funds through secondaries transactions. As part of fundraising for its third Structured Capital fund, VSS brought in a new investor, AlpInvest Partners, to buy out LP stakes in two previous Structured Capital funds and provide new capital for Fund III.

Remaining investments in Funds I and II held by LPs who sold were transferred to an annex fund that AlpInvest capitalized. The annex fund, VSS Structured Capital – Annex Fund LP, was valued at about $104.8 million, a Form D filing from January showed.

The firm also restructured another of its equity funds. Intermediate Capital Group in 2016 led the restructuring of VSS Communications Partners IV, which closed on $1.3 billion in 2005.

Update: The headline for this article was changed to clarify the nature of the SEC’s case.

Action Item: Check out VSS’s Form ADV here: