SEC Charges Private Equity Group For Using Unregistered Broker

The SEC has announced charges against New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker who violated securities laws when soliciting more than $500 million in capital commitments for private funds managed by the firm.

According to an SEC official “Registered brokers are subject to SEC oversight and examinations in order to monitor their conduct and protect the interests of investors . . . Investors in Ranieri Partners’ funds were denied these protections because [the unregistered broker-dealer] acted outside the boundaries of the law, [and a fund official] and the firm ignored the essence of his activities.”

The SEC documents state the unregistered broker dealer engaged in the business of effecting transactions in securities in several ways despite not being registered as a broker or affiliated with a registered broker-dealer. The individual in question sent private placement memoranda, subscription documents, and due diligence materials to potential investors, and urged at least one investor to consider adjusting portfolio allocations to accommodate an investment with Ranieri Partners. The unregistered broker-dealer provided potential investors with his analysis of the strategy and performance track record for Ranieri Partners’ funds, and also provided confidential information identifying other investors and their capital commitments.

The SEC’s order against the fund official and Ranieri Partners found that the fund official aided and abetted the unregistered broker-dealers violations by providing the unregistered broker dealer with key fund documents and information while ignoring red flags indicating that the unregistered broker-dealer had gone well beyond the limited role of a finder and was actively soliciting investments. The order found that Ranieri Partners caused the unregistered broker-dealer’s violations.

The SEC apparently did not allege that receipt of transaction based compensation alone was enough to find the engagement of an unregistered broker-dealer.  If you are engaged in the somewhat risky business of using “finders,” the action teaches that you should not provide them with private placement memorandums and the like and you must monitor their activities to ensure they do not cross the line into broker-dealer territory.  For more information on finders, see Part VI of our paper here.

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