SEC Charges Investment Adviser with Taking Unapproved and Undisclosed Fees
June 4, 2021
File No. 3-20359; 3-20360
June 4, 2021 - The Securities and Exchange Commission today announced settled charges against San Francisco Bay Area-based investment adviser VII Peaks Capital, LLC (VII Peaks) and its co-owner and managing member, Gurprit Chandhoke, for breaching their fiduciary duty by engaging in transactions that benefitted themselves to the detriment of their client. The SEC also charged Michelle E. MacDonald, the Chief Financial Officer of the BDC, with causing VII Peaks' violations.
According to the SEC's order, from late 2015 through 2017, VII Peaks and Chandhoke breached their fiduciary duty to VII Peaks Co-Optivist Income BDC II, Inc. (the BDC), a business development company, by engaging in transactions that were not disclosed to or approved by the Board of Directors of the BDC. First, the order finds that VII Peaks collected over $722,500 in due diligence fees for loans made by the BDC to various portfolio companies, even though the loan documentation said that the fees belonged to the BDC. The order finds that the arrangement created a material conflict of interest because VII Peaks and Chandhoke were incentivized to cause the BDC to make loans to portfolio companies in order to generate the fees for themselves. Second, the order finds that Chandhoke engaged in two transactions that benefitted himself financially and where his interests conflicted with the BDC's.
According to the SEC's order against MacDonald, MacDonald caused VII Peaks' breach of its fiduciary duty to the BDC by causing the BDC to transfer the due diligence fees to VII Peaks despite knowing that the agreements identified the BDC as the recipient of the fees and not being aware of any obligation to transfer the fees to VII Peaks. The order also finds that MacDonald failed to disclose or seek approval from the BDC's Board to have VII Peaks retain the fees.
The order against VII Peaks and Chandhoke charges Chandhoke with violating the antifraud provisions of Section 206(2) of the Advisers Act and the business development company provisions of Section 57(a) of the Investment Company Act and Rule 17d-1 thereunder. The same order charges VII Peaks with violating Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The order against MacDonald charges her with causing VII Peaks' violations of Section 206(2) of the Advisers Act.
Without admitting or denying the SEC's findings, VII Peaks agreed to a cease-and-desist order and to pay disgorgement of $722,500, prejudgment interest of $123,199, and a civil penalty of $185,000, while Chandhoke agreed to an associational suspension, investment company prohibition, and penny stock suspension, all for a period of twelve-months, a cease-and desist order, and to pay disgorgement of $87,500, prejudgment interest of $16,857, and a civil penalty of $90,000. Without admitting or denying the SEC's findings, MacDonald agreed to a cease-and-desist order and to pay a $20,000 penalty.
This matter was investigated by Kashya Shei and Michael Foley, with the assistance of trial counsel Sheila O'Callaghan, and was supervised by Jeremy Pendrey and Monique C. Winkler, all of the Enforcement Division in the SEC's San Francisco Regional Office. This matter was a referral from the Division of Examinations of the San Francisco Regional Office. Kathleen Purcell, Peter D. Bloom, Matthew O'Toole, Leo Chan, Michael Tomars, and Edward Haddad, of the same Examination Division, assisted in the investigation.