SEC Settles Cases Alleging Compliance Failures at Private Equity Firms


On March 11, the SEC announced two matters of significant importance to the private equity industry and to private fund sponsors generally. Together, these cases demonstrate the SEC’s continued focus on the private equity industry, in particular the role of compliance in preventing and detecting possible violations of the securities laws. These cases also reflect the SEC’s interest in monitoring the fundraising activities, valuation practices, and disclosures to investors of private fund sponsors. Although these two matters involved private equity firms, the issues they raised are applicable to a broad range of private fund sponsors, including fund-of-fund and hedge fund managers.

Oppenheimer -

In the first case, the SEC filed an order instituting settled administrative proceedings against Oppenheimer Asset Management Inc. and Oppenheimer Alternative Investment Management, LLC (“Oppenheimer”) for allegedly misleading investors about the valuation policies and performance of its Oppenheimer Global Resource Private Equity Fund I LP (“OGR”). OGR was a fund-of-funds, with an investment strategy that involved investment in other private equity funds. OGR’s marketing materials and quarterly reports stated that the Fund’s asset values were “based on the underlying managers’ estimated values.”

According to the SEC, however, Oppenheimer shifted its valuation methodology with respect to one of the private equity funds in OGR’s portfolio, causing it to be valued at a significant markup to the underlying manager’s estimated value. That investment, Cartesian Investors-A, LLC (“Cartesian”), was invested solely in a holding company set up by the Romanian government to compensate citizens whose property was seized by the Communist regime. Rather than using Cartesian’s own valuation methodology, Oppenheimer valued Cartesian at par—the price at which the Romanian government issued shares. This alleged overvaluation of Cartesian resulted in OGR’s internal rate of return increasing from 3.8 to 38.3 percent for the quarter ended June 30, 2009. The SEC also alleged that Oppenheimer falsely represented to potential investors that Cartesian had been subject to evaluations by independent valuation firms and auditors.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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