GP winds down following SEC charges

In the second case of its kind this month, the US Securities and Exchange Commission (SEC) has charged another private equity manager with the misallocation of compliance expenses. Cranshire Capital Advisors will ultimately close its shop as a result of compliance failures, which primarily included allocating compliance, legal and operating costs to its funds without proper disclosure.
 
From 2012 to 2014, Cranshire hired an outside attorney to serve as a compliance consultant, and used $158,650 in fund assets to pay the consultant's fees. Although the fund's private placement memoranda (PPM) and limited partnership agreements (LPAs) disclosed that the fund would pay for its own legal and accounting fees and its own external legal and operational expenses, the SEC argues that the documents did not authorise Cranshire to charge the fund for its own compliance consulting fees. The GP also charged $118,378 to the fund for office supplies, computers and utilities.
 
The SEC states that Cranshire's compliance manual did not include a policy or procedure for determining when an item was properly chargeable to the fund. The GP also did not adequately review employees' personal securities holdings for conflicts of interest, according to the SEC order.
 
Cranshire did hire a new outside compliance consultant to address these issues in Autumn 2014. As part of its charges, the SEC has mandated that Cranshire retain this second consultant until it no longer has any assets under management. Cranshire, which had $94.4 million in AUM as of May, withdrew its SEC registration in March and is winding down. The firm was also censured and fined $250,000.
 
The Cranshire case marks the second time this month when the SEC has charged a private equity manager for misallocating compliance costs. In early November, Cherokee Investment Partners was fined $100,000 for improperly allocating consulting, legal and compliance expenses back to three of its funds. High-profile managers such as Kohlberg Kravis Roberts and The Blackstone Group have also recently settled SEC charges related to improper fee and expense allocations.  
 
“The SEC still has not closed the door on charging compliance expenses to the funds if properly disclosed. The open question is how much disclosure will satisfy the SEC?” noted compliance consultant Todd Cipperman in an email alert on the Cranshire case.