Scott M. Landress sponsored funds to invest in real estate private equity secondary transactions in 2006. When one of the funds got into trouble, Landress asked for additional fees. The fund advisory board said no. Landress later charged unauthorized fees for services provided by an affiliate.
SLRA’s fund management fee was based on the net asset value of the fund’s underlying investments. If you bought real estate in 2006, your net asset value dropped for a few years. The Liquid Realty Partners fund saw its net asset value decline by 94%.
Landress and SLRA were stuck with declining values and increased costs to manage those assets through the financial crisis. They had to deal with loan defaults and foreclosures and attempts at recapitalization.
Between 2009 and 2011 Landress asked the fund limited partners for more compensation. It should come as no surprise that they said no.
In early 2014, Landress withdrew £16.25 million from the fund for service fees related to acquisitions, dispositions and financing work performed by an affiliate of the general partner. The charge was 1.25% of thirteen transactions.
The service was provided through an oral agreement. It did not appear in the fund documents. It was not approved by the fund’s advisory board which is required for related party transactions. The charges were not shown as accumulated on the fund’s financial statements or disclosed to the auditors.
Landress wrote a letter to the fund’s limited partners telling them he was taking the fee. They were understandably upset. Both sides went into negotiation over these fees. The LPs tried removing the GP and stopping the payment.
Surprisingly, Landress sued the LPs for declaratory relief that he was entitled to the fees. The argument was that SLRA had to do all that additional work that was outside the scope of the management fee paid to the fund’s general partner. The LPs lawyered up and notified the SEC of the problem.
Landress and SLRA ended up returning the cash and Landress got barred from the industry.
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