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SEC Charges New York-Based Private Equity Fund Adviser With Misallocation Of Portfolio Company Expenses


Washington D.C., Sept. 22, 2014 —

The Securities and Exchange Commission today charged a New York-based investment advisory firm with breaching its fiduciary duty to a pair of private equity funds by sharing expenses between a company in one’s portfolio and a company in the other’s portfolio in a manner that improperly benefited one fund over the other.

An SEC investigation found that while Lincolnshire Management integrated the two portfolio companies and managed them as one, the funds were separately advised and had distinct sets of investors.  Despite developing an expense allocation policy as part of the integration, it was not followed on some occasions, resulting in the portfolio company owned by one fund paying more than its fair share of joint expenses that benefited the companies of both funds.

Lincolnshire agreed to pay more than $2.3 million to settle the SEC’s charges.

“Lincolnshire’s decision to integrate two portfolio companies owned by separate private equity funds resulted in the misallocation of expenses between the two companies,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Advisers that commingle assets across funds must do so in a manner that satisfies their fiduciary duties to each fund and prevents one fund from benefiting to the detriment of the other.”

According to the SEC’s order instituting a settled administrative proceeding, Lincolnshire Equity Fund acquired the first company in 1997, and Lincolnshire Equity Fund II purchased the second company four years later.  Lincolnshire immediately disclosed to limited partners in both funds that it intended to integrate the two companies because they had valuable synergies and could complement each other.  From at least 2005 to January 2013, the two portfolio companies each paid Lincolnshire annual consulting fees of $250,000.  The two companies integrated a number of business and operational functions, including payroll and 401(k) administration, human resources, marketing, and technology.  They also entered into a joint line of credit, formed a joint management team, and had a joint logo.     

According to the SEC’s order, the portfolio companies shared numerous annual expenses that generally were allocated between them based on each company’s contributions to their combined revenue.  However, there were times when a portion of the shared expenses were misallocated and went undocumented.   For example, the company owned by Lincolnshire Equity Fund paid the entire third-party payroll and 401(k) administrative expenses for the employees of both companies.  The Singapore subsidiary of Lincolnshire Equity Fund’s portfolio company sold supplies and performed services at cost for Lincolnshire Equity Fund II’s portfolio company even though Lincolnshire Equity Fund II’s portfolio company did not pay any share of the overhead expenses for the Singapore subsidiary.  Additionally, there were several employees who performed work that benefited both companies, but their salaries were not allocated between the two.  Similarly, when executives were paid bonuses as the companies were sold together in January 2013, Lincolnshire Equity Fund paid a portion of the bonuses to two executives who were solely employed by Lincolnshire Equity Fund II’s portfolio company. 

The SEC’s order also finds that Lincolnshire failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 arising from the integration of the two portfolio companies.    

Lincolnshire consented to the entry of the order finding that it violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7.  Without admitting or denying the findings, Lincolnshire agreed to cease and desist from committing or causing future violations of these provisions and to pay $1.5 million in disgorgement plus $358,112 in prejudgment interest and a $450,000 penalty.

The SEC’s investigation was conducted by Donna Norman, Igor Rozenblit, Natalie Lentz, and Duane Thompson.  The case was supervised by Anthony Kelly.


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