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SEC: Private Equity Fund Adviser Acted As Unregistered Broker

FOR IMMEDIATE RELEASE
2016-100

Washington D.C., June 1, 2016—

The Securities and Exchange Commission today announced that a Maryland-based private equity fund advisory firm and its owner have agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity and charged fees without registering as a broker-dealer and committed other securities law violations.
An SEC investigation found that Blackstreet Capital Management and Murry N. Gunty performed in-house brokerage services rather than using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for a pair of private equity funds they advise.  Blackstreet fully disclosed to its funds and their investors that it would provide brokerage services in exchange for a fee, yet the firm failed to comply with the registration requirements to operate as a broker-dealer.
 
“The rules are clear: before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “Blackstreet clearly acted as a broker without fulfilling its registration obligations.”
 
The SEC’s investigation, which stemmed from an agency examination of Blackstreet, further found that the firm and Gunty engaged in conflicted transactions and inadequately disclosed fees and expenses.
 
According to the SEC’s order:
  • Blackstreet charged fees to portfolio companies in one fund for providing operating partner oversight, but the fund’s limited partnership agreement (LPA) did not disclose that Blackstreet received such fees.  This resulted in a conflict of interest because Blackstreet used fund assets to compensate itself. 
  • Blackstreet used fund assets to pay for political and charitable contributions as well as entertainment expenses. These expenditures were not expressly authorized by the funds’ governing documents, and Blackstreet neither sought nor obtained appropriate consent. 
  • Blackstreet engaged in a conflicted transaction when it acquired a departing employee’s shares in one fund’s portfolio companies without disclosing its financial interests or obtaining appropriate consent to engage in the transaction. 
  • Gunty, through an entity he controlled, acquired fund interests from certain limited partners and then directed the fund’s general partner (which he also controlled) to waive his obligation to satisfy future capital calls associated with new investments.  These acquisitions and subsequent waivers were contrary to the terms of the fund’s LPA, and Blackstreet’s failure to disclose these waivers rendered the LPA materially misleading.
  • Blackstreet failed to adopt and implement reasonably designed policies and procedures. 
“Private equity fund advisers must manage their funds in accordance with the governing documents,” said Anthony S. Kelly, Chief of the SEC Enforcement Division’s Asset Management Unit.  “Blackstreet operated outside of the funds’ documents by using fund assets to make political and charitable contributions and pay entertainment expenses.” 
 
The SEC’s order finds that Blackstreet violated Section 15(a) of the Securities Exchange Act of 1934, and Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8.  The order finds that Gunty caused Blackstreet’s violations.  Without admitting or denying the findings, Blackstreet agreed to be censured and Blackstreet and Gunty must cease and desist from further violations while paying combined disgorgement of $2.339 million, including $504,588 that will be distributed back to affected clients.  They also agreed to pay $283,737 in interest and a $500,000 penalty. 
 
The SEC’s investigation was conducted by Brian Privor, Dmitry Lukovsky, and Corey Lawson, and supervised by Mr. Kelly.  Assisting the investigation were Christian Schultz and Dean Conway.  The examiners who participated in the examination that led to the investigation were Steven R. Dittert, Michelle A. Heid, Kevin P. Logue, William M. Lavin, Kristy L. Moore, and Andy E. Groum.
 

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