The Securities and Exchange Commission brought another enforcement case involving an investment adviser and private funds. PageOne is a registered investment adviser that recommended three private investment funds to its clients. The SEC found serious conflicts the were not disclosed or materially misrepresented.
PageOne disclosed that is was paid a “referral fee” by the private funds. What PageOne failed to disclosed was
- one of the private funds’ managers was in the process of acquiring at least a 49% interest in PageOne
- PageOne had pledged to raise millions from its clients for the private funds, and
- The fund manager was paying for the acquisition in installments tied to Page’s ability to direct the client money into the private funds.
The SEC characterized the “referral fee” as installment payments on the acquisition. I’m not sure that is a meaningful distinction, cash is cash, but it certainly seems to have annoyed the SEC.
The bigger failure is that the Form ADV disclosed the “referral fee” as being between 7% and 0.75% when it was as much as 15%. It also labeled the funds as managed by unaffiliated investment advisers. Clearly, that is not true when the fund manager has the right to buy the adviser.
PageOne’s clients invested between $13 million and $15 million in the private funds based on his recommendation and earned over $2.7 million in acquisition payments. The problem bubbled to surface because PageOne was required to raise $20 million for the acquisition to close. It turns out the “referral fees” were loan advances. When the acquisition did not close, PageOne’s owner was personally liable for repayment.
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