The Yucaipa Master Manager didn’t properly inform investors of all costs tied to preparing tax returns. Yucaipa resolved the case without admitting or denying the SEC’s allegations.
Under the fund documents for the Yucaipa American Alliance private equity funds, the cost of preparing the funds’ tax tax returns are an expense of the funds. Yucaipa decided to bill a portion of the costs of the fund manager’s in-house tax partner and in-house tax manager to the fund for their time spent preparing the funds’ tax returns.
The funds’ documents also provided that the fund manager/general partner bears the cost of its normal operating overhead, including “salaries, other compensation and benefits of the Manager’s employees.”
There is some conflict between the provisions in the fund documents. The in-house employees were less expensive than the outside vendors also involved in the tax work. For the funds’ it was likely a cost savings or at least not any more expensive.
The problem is not apparent when not looking from the funds’ perspective, but from the manager’s perspective. This is an extra revenue source for the manager. There is a conflict that had to be approved by investors.
It’s not that a manager can’t charge in-house employees to the fund. But to do so, it must be disclosed to the investors or otherwise approved by the investors.
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