The SEC announced a settled action against Beverly Hills-based investment adviser, Platinum Equity Advisors, LLC, for charging three of its private equity fund clients with about $1.8 million more than it should have in broken deal expenses.
According to the SEC’s order, from 2004 to 2015, the three private equity funds invested in 85 companies, in which co-investors connected with Platinum also invested. During this time, Platinum incurred expenses related to potential fund investments that were not ultimately made, known as “broken deal expenses.” While the co-investors participated in Platinum’s successful transactions and benefited from Platinum’s sourcing of private equity transactions, Platinum did not allocate any of the broken deal expenses to the co-investors. Instead, it allocated all broken deal expenses to the private equity funds even though the agreements governing the funds did not disclose that the funds would be responsible for anything other than their own expenses. The Commission found that from Q2 2012 to 2015 (the applicable limitations period for disgorgement in this matter), the private equity funds were allocated $1,811,501 more in broken deal expenses than they should have been. In addition, Platinum did not adopt and implement a written compliance policy or procedure governing its broken deal expense allocation practices.
The SEC’s order finds that Platinum violated Sections 206(2) and 206(4) of the Investment Advisers Act, and Rule 206(4)-7 thereunder. Without admitting or denying the findings in the SEC’s order, Platinum consented to the entry of a cease-and-desist order and agreed to pay a total of $1,902,132 in disgorgement and prejudgment interest and a $1.5 million civil penalty.