New York-based private equity firm Fenway Partners LLC and four of its executives agreed Tuesday to settle Securities and Exchange Commission charges that they failed to disclose conflicts of interest to a fund client and investors when fund and portfolio company assets were used for payments to former firm employees and an affiliated entity.
Fenway Partners along with principals Peter Lamm and William Gregory Smart, former principal Timothy Mayhew Jr., and chief financial officer Walter Wiacek “weren’t fully forthcoming to the client and investors” about several transactions involving more than $20 million in payments out of fund assets or portfolio companies to an affiliated entity for consulting services and to Mayhew and other former firm employees for services they primarily provided while still working at Fenway Partners, according to an SEC investigation.
Andrew Ceresney, director of the SEC Enforcement Division, said in announcing the agreemen that Fenway Partners and its principals “failed to tell their fund client that they rerouted portfolio company fees to an affiliate, and avoided providing the benefits of those fees to the fund client in the form of management fee offsets.”
Private equity advisors, he warned, “must be particularly vigilant about conflicts of interest and disclosure when entering into arrangements with affiliates that benefit them at the expense of their fund clients or when receiving payments from portfolio companies.”
Fenway Partners and its principals also breached their fiduciary obligation “to fully and fairly disclose conflicted arrangements to a fund client, and compounded the breach by omitting material facts about the arrangements when communicating with fund investors,” added Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.
The SEC’s Asset Management Unit continues to crackdown on private equity fee and expense issues. Less than a month ago, three private equity fund advisors within The Blackstone Group agreed to pay nearly $39 million to settle charges brought by the SEC that they breached their fiduciary duties by failing to fully inform investors about benefits they received from accelerated monitoring fees and discounts on legal fees.
Nearly $29 million of that settlement will be distributed to affected fund investors.According to the SEC’s order instituting a settled administrative proceeding in the Fenway Partners’ case:
- Fenway Partners entered into contracts with certain portfolio companies held by Fenway Capital Partners Fund III L.P. under which the companies paid fees to Fenway Partners that were offset against the management fees the firm earned from the fund.
- Beginning in December 2011, Fenway Partners and the four executives caused certain portfolio companies to terminate their payment obligations to Fenway Partners and enter into consulting agreements with an affiliated entity named Fenway Consulting Partners LLC.
- Fenway Consulting Partners provided similar services to the portfolio companies often through the same employees, but the fees paid to Fenway Consulting Partners (totaling $5.74 million) were not offset against the management fees that the fund paid to Fenway Partners.
- Fenway Partners, Lamm, Smart, and Wiacek asked fund investors to provide $4 million in connection with an investment in a portfolio company without disclosing that $1 million would be used to pay Fenway Consulting.
- Fenway Partners, Lamm, and Mayhew caused Mayhew and two former Fenway Partners employees to receive $15 million in incentive compensation from the sale of a portfolio company for services that they had almost entirely provided when they were Fenway Partners employees.
- Fenway Partners also failed to disclose these payments as related party transactions in the financial statements they provided to investors.
Without admitting or denying the SEC order’s findings, Fenway Partners, Lamm, Smart and Mayhew agreed to jointly and severally pay disgorgement of $7.892 million and prejudgment interest of $824,471.10. They and Wiacek also agreed to pay penalties totaling $1.525 million. The total amount of $10,241,471.10 will be placed into a fund for harmed investors.