Bruce Karpati, chief of the SEC’s Asset Management Unit, promised us several weeks ago that enforcement actions against private equity firms were about to heat up. He wasn’t kidding. Last Monday, the SEC filed two sets of settled administrative proceedings against private equity firms. We’ll discuss one of them today, and the second in a later post.

Fans of Michael Lewis’s Liar’s Poker will remember the subject of the first action. A central character from that hilarious book is Lewis Ranieri, a former head of the mortgage bonds desk at Salomon Brothers and considered by many to be the godfather of mortgage securitization. He now runs Ranieri Partners, a New York-based private equity firm, and has therefore apparently walked into Karpati’s plans for the SEC’s Enforcement Division.


In the first set of cases, In re Ranieri Partners LLC, Admin. Proc. File No. 3-15234, and In re Williams Stephens, Admin. Proc. File No. 15233, the SEC charged Ranieri Partners; Donald Phillips, a former senior managing partner of the firm; and William Stephens, an independent business generator, with violations related to Stephens’s actions as an unregistered securities broker.

According to the SEC’s order, while working as an independent consultant for Ranieri Partners from February 2008 through March 2011, Stephens actively solicited investors on behalf of private funds managed by Ranieri Partners’ affiliates. He allegedly raised over $500 million and, in return, received transaction-based compensation totaling approximately $2.4 million. The SEC’s order says Stephens’ solicitation efforts specifically included:

  1. sending private placement memos, subscription documents, and due diligence materials to potential investors;
  2. urging an investor to adjust its portfolio allocations to accommodate an investment with Ranieri Partners;
  3. providing potential investors with his analysis of Ranieri Partners’ funds’ strategy and performance track record; and
  4. providing potential investors with confidential information relating to the identity of other investors and their capital commitments.

Sadly for Stephens, one cannot do those things without being registered as a securities broker. Doing so amounts to violating Section 15(a) of the Exchange Act. Because Phillips provided Stephens with key documents and information related to Ranieri Partners’ private equity funds, and Ranieri Partners basically allowed it to happen, they are also on the hook. Phillips for aiding and abetting Stephens’s violations, and Ranieri Partners for “causing” them.

Lessons from the Case

If you are a private equity fund seeking investors, remember that the limited partnership interests you’re selling are securities. The people who generate that business for you are likely acting as securities brokers, especially if they are receiving commissions based on the investments they bring in. If appropriate, get registered as a broker-dealer. Get your people registered. The SEC’s Trading & Markets Division truly dislikes this activity, and it is looking more and more as though they are convincing the Enforcement Division that it should be punished as well.

Also, Stephens was ordered to pay disgorgement of $2.4 million and prejudgment interest of $410,000, but he is not actually paying a dime. Here’s the reason: the SEC hates letting defendants walk away for nothing, but it also hates spending resources chasing down judgments that are impossible to collect. On occasion the SEC will allow defendants to demonstrate an inability to pay a proposed judgment, and then waive the financial sanctions on that basis, which is what happened here. The waiver process is quite tedious, and involves producing tax returns, bank statements, and a lot of other information. Enforcement staff packages the information and presents it to the Commissioners when seeking approval to file the settled matter. At that point, the staff is essentially advocating for the defendant. From time to time various Commissioners will say aloud that they have had it up to here with financial waivers and they are not inclined to approve any more of them. But at least as of March 11, 2013, these waivers are alive and well. If they are in severe financial straits, settling SEC defendants should consider advocating for them.