The Securities and Exchange Commission (SEC) has announced settled charges against New York-based private equity firm Fenway Partners and four executives for failing to disclose conflicts of interest. The charges relate to transactions where fund and portfolio company assets were used for payments to former firm employees and an affiliated entity, totaling over $20 million.
An SEC investigation revealed that Fenway Partners, along with principals Peter Lamm and William Gregory Smart, former principal Timothy Mayhew Jr., and chief financial officer Walter Wiacek, did not fully inform their fund client and investors about several transactions. These transactions involved payments from fund assets or portfolio companies to Fenway Consulting Partners LLC, an affiliated entity, for consulting services, and to Mayhew and other former employees for services largely rendered while they were still employed by Fenway Partners.
Andrew J. Ceresney, Director of the SEC Enforcement Division, stated, “Fenway Partners and its principals failed to disclose to their fund client that they were redirecting portfolio company fees to an affiliate, thereby depriving the fund client of the benefits of those fee offsets.” He emphasized the critical need for private equity advisors to be transparent about conflicts of interest, especially when dealing with affiliates that could benefit them at the expense of their clients or when receiving payments from portfolio companies.
Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added that Fenway Partners and its executives breached their fiduciary duty by not fully and fairly disclosing these conflicted arrangements to their fund client. He further noted that they compounded this breach by omitting crucial details about these arrangements in communications with fund investors.
The SEC’s order instituting a settled administrative proceeding detailed several key findings:
- Fee Arrangements: Portfolio companies held by Fenway Capital Partners Fund III L.P. had agreements to pay fees to Fenway Partners, which were intended to offset the management fees the firm earned from the fund.
- Affiliate Engagement: Starting in December 2011, Fenway Partners and the executives orchestrated the termination of these payment obligations to Fenway Partners. Instead, the portfolio companies entered into consulting agreements with Fenway Consulting Partners LLC, a Fenway Partners affiliate.
- Undisclosed Fees: Fenway Consulting Partners provided similar services, often through the same personnel. However, the fees paid to Fenway Consulting Partners, amounting to $5.74 million, were not used to offset the management fees paid by the fund to Fenway Partners.
- Investor Solicitation: Fenway Partners, Lamm, and Wiacek requested $4 million from fund investors for a portfolio company investment, without disclosing that $1 million would be directed to Fenway Consulting.
- Incentive Compensation: Fenway Partners, Lamm, and Mayhew facilitated $15 million in incentive compensation from a portfolio company sale to Mayhew and two other former Fenway Partners employees. These payments were for services primarily conducted while these individuals were still employed by Fenway Partners.
- Financial Statement Omissions: Fenway Partners also neglected to disclose these payments as related party transactions in the financial statements provided to investors.
To resolve the SEC’s charges without admitting or denying the findings, Fenway Partners, Lamm, Smart, and Mayhew agreed to a joint and several disgorgement of $7.892 million, plus prejudgment interest of $824,471.10. Additionally, they and Wiacek consented to pay penalties totaling $1.525 million. The total sum of $10,241,471.10 will be placed into a fund to compensate harmed investors.
The SEC investigation was conducted by Mark D. Salzberg and Gregory Maccordy of the Asset Management Unit, along with Kevin McGrath, Neal Jacobson, and Lisa Knoop of the New York Regional Office, under the supervision of Panayiota K. Bougiamas of the Asset Management Unit.
This case underscores the SEC’s commitment to ensuring transparency and fairness in the private equity industry, particularly regarding disclosures of potential conflicts of interest that could disadvantage investors.
