SEC Charges Clean Energy l Securities Lawyer 101
On February 25, 2014, the Securities and Exchange Commission (the “SEC”) announced SEC charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.
The SEC charges allege that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants.CEC and Brittenham did not disclose any such payment arrangement in fund offering documents.
According to the SEC charges, when the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds.
The loans were made at unfavorable interest rates and they then unilaterally changed how they calculated investor returns to benefit themselves.
“Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.“Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”
According to the SEC’s order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses.Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself.The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.
According to the SEC charges, the expense misallocation scheme shrank the funds’ cash reserves.So CEC and Brittenham made unauthorized “loans” to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets.The loans jeopardized the funds because Brittenham had pledged fund assets as collateral.CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money.Brittenham also lied to a fund investor about his “skin in the game.”Brittenham claimed that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.
The SEC’s order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.
The SEC’s investigation was conducted by Payam Danialypour and C. Dabney O’Riordan of the Asset Management Unit in the Los Angeles Regional Office and accountant Deborah Russell in Washington D.C.The SEC’s litigation will be led by Amy Longo, Lynn Dean, and Mr. Danialypour.The SEC examination that led to the investigation was conducted by Ryan Hinson, Ernest Tang, Daniel Jung, and Thomas Mackin of the Los Angeles office’s investment adviser/investment company examination program.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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