PE firm settles with SEC over secondaries deal

Private equity firm Blackstreet had allegedly bought stakes in its own funds and then waived its own capital calls.

Blackstreet Capital, a Maryland-based private equity firm, has agreed to pay $3.1 million to settle charges relating to violations of US securities laws including one relating to a secondaries deal in a 2009-vintage fund.

Murry Gunty, managing partner at Blackstreet, bought stakes in the firm's second fund through a secondaries transaction and subsequently directed capital calls to be waived on his fund stakes, according to a statement by the SEC.

Private equity fund advisers must manage their funds in accordance with the governing documents,” Anthony Kelly, chief of the SEC enforcement division's asset management unit, said in the statement.

Blackstreet Capital Partners II (BCP II) closed on $91 million and mainly invested in leveraged buyouts of businesses located in the eastern United States which had revenues between $20 million and $100 million, according to the regulator.

Gunty acquired interests in BCP II from two defaulted LPs and from six LPs who were looking to exit the fund. Gunty directed the fund's general partner to waive his obligation to make future capital calls on any new investments that would have been associated with the stakes he bought from the eight LPs, the SEC said.

Blackstreet's failure to disclose the waivers meant the limited partnership agreement regarding LPs' obligations to make future capital calls was “materially misleading”, the complaint said. Although Gunty did not receive gains from new investments made in BCP II, the arrangement reduced the capital available for investment opportunities and increased the pro rata share of future capital calls for remaining LPs, according to the SEC statement.

The SEC also found that Blackstreet engaged in brokerage activities and charged fees without registering as a broker-dealer.

In a statement, a spokesman for Blackstreet said: “We are pleased to be able to put this matter behind us and we look forward to continuing our work to deliver great returns for our investors.”

Gunty is still managing partner at Blackstreet, the spokesman confirmed. Without admitting or denying the findings, Blackstreet agreed to be censured. Blackstreet and Gunty agreed to pay a combined disgorgement of $2.339 million, including $504,588 that will be distributed back to affected clients. They also agreed to pay $283,737 in interest and a $500,000 penalty.

According to the SEC, Blackstreet also used fund assets to compensate itself by charging fees to portfolio companies; made political and charitable contributions and paid for entertainment expenses using fund assets; engaged in a conflict of interest regarding acquiring a departing employee's shares in portfolio companies, and failed to adopt and implement reasonably designed policies and procedures.

The Blackstreet settlement comes after two high-profile SEC charges relating to secondaries-related professionals this year. In March, former Park Hill director Andrew Caspersen was charged with allegedly attempting to defraud $95 million out of investors related to a restructurings deal, and in April, Hugh Dunkerley, who bought Paris fund of funds Fondinvest last year, left the firm after the SEC charged him with alleged fraud related to a tribal bonds scheme.

Blackstreet has invested in 30 companies with combined sales in excess of $1.5 billion and over 8,000 employees, according to its website.