The Securities and Exchange Commission has made the industry very aware that it will look closely at the way private-equity firms handle fund expenses. The latest firm to get caught by the SEC for taking money from investors is Corinthian Capital.
Corinthian agreed to theorder, but it contains the usual carve-out that Corinthian neither admits nor denies the findings in theorder. Things may have actually happened different, but Im accepting whats in there as a warning for what the SEC does not like.
The first problem was related to improperly using a fee offset according to the the fund documents. The order does a poor job of explaining the operation of this particular offset. It seems like Corinthian affiliated limited partners are able not fund part of their capital commitments. The fund documents are silent on whether the offset can be applied retroactively. Corinthian applied it retroactively. Worse, the firm miscalculated the offset.
Compounding the miscalculation problem, Corinthian withdrew more than it was entitled to in fees from the fund to pay down the managers line of credit. Once that line was crossed, Corinthian transferred other cash from the fund to pay management expenses.
The second problem was charging the fund for organizational expenses that were not permitted by the fund documents. On problem is that the management company charged the fund for expected formation expenses. The SEC pointed out that this was improper because those expenses had not actually been incurred.
In addition, Corinthian misclassified some expenses as organizational expenses and ended up charging costs to the fund partners that should not have been charged to them. One item specifically reference is a placement agent fee.
Corinthian also lacked policies and procedures with respect to charging CEF 2 for organizational expenses. Informal practices, dating from a former CFO, were put in place that gave great discretion to estimate and classify organizational expenses. While the CFO tracked and the investment committee determined the amount charged to CEF 2 for organizational expenses as referenced in Paragraph 12, no process was implemented to determine the accuracy of such estimates or whether expenses were properly classified.
The third problem was that Corinthians auditor noticed these problems. The auditor chose to withdraw from the engagement and withdraw its opinion from the prior years financial statements. That left Corinthian not timely delivering audited financial statements and therefore in violation of theCustody Rule.
SEC Order Against Corinthian Capital Group, LLC, Peter B. Van Raalte, and David G. Tahan
SEC Settles with Private Fund Manager and its Principals Over Alleged Misuse of Fund Assets
Corinthian Capital,Corinthian Equity Fund,David G. Tahan,Peter B. Van Raalte
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Compliance Building is published byDoug Cornelius, focusing on compliance and ethical issues for private equity real estate companies. Read more in
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