Private Equity Funds Compliance Lapses Lead to SEC Sanctions

Simon Riveles Compliance, Private Equity Fund, SEC

By Ryan Finn and Simon Riveles

On March 11th, the SEC announced two decisions involving private equity firms that demonstrate its commitment to emphasizing the important role of compliance in preventing and detecting possible violations of the securities laws.  Although these cases dealt specifically with the activities of private equity firms, the issues raised by the SEC’s decisions were broad enough to be relevant and applicable to managers of private fund sponsors generally, including fund-of-fund and hedge funds.


In this case, the SEC charged the New York-based Private Equity Firm with misleading investors about the valuation and performance of its Oppenheimer Global Resource Private Equity Fund I LP (“OGR”).

A fund-of-funds, with an investment strategy that included investment in other private equity funds, OGR’s marketing materials and reports indicated that the Fund’s asset values were “based on the underlying manager’s estimated values.”  With respect to one of the funds in its portfolio, the SEC alleged that OGR shifted its valuation methodology away from that fund’s own estimation, causing a significant increase in value.  The alleged overvaluation caused an the Fund’s internal rate of return to increase from 3.8% to 38.3% for the quarter ended June 30, 2009.

“Honest disclosure about how investments are valued and how performance is measured is vital to private equity investors,” stated George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “This action against Oppenheimer for misleadingly writing up the value of illiquid investments is clear warning that the SEC will not tolerate lax disclosure practices in the marketing of private equity funds.”

Specifically, the SEC:

  • Alleged that that an edited quarterly report was not resubmitted for compliance department review in accordance with firm policy
  • Found that OGR falsely represented to potential investors that underlying fund values were subjected to independent review
  • Concluded that OGR’s “policies were not reasonably designed to ensure that valuations were determined in a manner consistent with written representations to investors”


In this case, the SEC charged a private equity firm, a former firm executive, and an unregistered “finder” for improper finder’s activities in soliciting more than $500 million in capital commitments.

The private equity firm Renieri Partners (“Ranieri”) entered into a consulting agreement with an individual “finder” who was to make initial introductions between potential investors and Ranieri but who was not permitted to provide private placement memoranda directly to potential investors or to directly discuss the merits of the Ranieri funds.

The SEC determined that the finder performed duties beyond that of mere potential-investor introductions, and that he failed to register as a broker-dealer.  Further, the SEC concluded that:

  • Ranieri and its former executives failed to oversee the finder’s activities
  • Ranieri failed to limit the finder’s access to key documents
  • Ranieri took no further steps to monitor or limit the finder’s access to investors after they knew or should have known he was engaging in prohibited activities.
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