Posted by Barry Hollander on 07/29/2016

Last month, the SEC issued an administrative order sanctioning Blackstreet Capital Management LLC (“BCM”) and BCM’s managing member and principal owner, Murry N. Gunty, for acting as an unregistered broker-dealer, in violation of the Securities Exchange Act of 1934, as well as violations of the Investment Advisers Act of 1940, as amended. BCM and Gunty, without admitting or denying the allegations, consented to issuance of the order and imposition of the sanctions.

BCM, an RIA, is the adviser to two private equity funds. BCM provided disclosure to investors and the funds’ governing documents which permitted Blackstreet to render brokerage services to and charge transaction based compensation in connection with the funds’ acquisition and disposition of portfolio companies. The brokerage services identified in the order included soliciting deals, identifying buyers and sellers, negotiating and structuring transactions, arranging financing and executing the transactions. The SEC found that BCM provided received at least $1,877,000 in such compensation despite the fact that BCM had never been registered with the SEC as a broker.

In addition, the SEC also found that BCM:

  1. Improperly charged two portfolio companies owned by one of the funds they advised $450,000 in oversight fees. The fund’s governing documents did not expressly authorize BCM to charge these fees and the fees were not disclosed to the fund’s limited partners until after BCM received them. 
  2. Improperly used fund assets to make political and charitable contributions and pay for certain entertainment expenses. The funds’ governing documents did not expressly authorize BCM to use fund assets for these purposes. BCM also did not adequately track or maintain records of whether entertainment expenses were for business or personal use.
  3. Improperly acquired shares in portfolio companies, and improperly acquired interests in one of the funds from defaulting and exiting investors, when those shares should have been repurchased by the portfolio companies for the benefit of the fund.

The order requires Blackstreet to disgorge the brokerage fees, as well as certain unrelated and “unauthorized and inadequately disclosed” fees that had been charged to the private equity funds. Together with prejudgment interest and a fine of $500,000, Blackstreet and Gunty are required to pay a total of $3,122,737.

Takeaways:

  1. The SEC is intent on requiring broker-dealer registration for advisers to private equity funds that earn transaction based compensation.
  2. Disclosure of all fees to fund investors is critical.
  3. Proper records should be maintained for expenses paid by the funds to ensure that they were appropriately allocated.