The US Securities and Exchange Commission has charged Arizona private equity firm Clean Energy Capital with misallocating expenses to their own private equity funds.
The SEC said in a statement that Clean Energy president and chief executive officer Scott Brittenham improperly paid out more than $3 million in expenses using assets from 19 funds without disclosing the terms related to the expenses in Clean Energy fund documents.
“Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors,” Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit said in the statement. “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.”
The misallocated expenses include Clean Energy rent payments, salaries and unemployment benefits such as tuition costs, retirement and bonuses. About 70 percent of a $100,000 bonus for Brittenham, who also co-founded the firm in 2003, was funded by fund assets, according to the SEC.
When Clean Energy Capital’s 19 funds ran out of cash to pay the firm’s expenses, Clean Energy and Brittenham loaned money to the funds at interest rates as high as 17 percent and changed the way investor returns were calculated to benefit themselves, according to the statement.
Clean Energy attorney Aegis Frumento, a partner at New York law firm Stern Tannenbaum & Bell, told Private Equity International that Brittenham and the firm have not broken any laws.
“We think the SEC has overreached in this case,” Frumento said. “They have unwarranted interpretation of the law and we look forward to proving them wrong.”
The SEC also alleges that Brittenham lied to an investor by claiming that he and Clean Energy co-founder Gary Schwendiman had each invested $100,000 of their own money in one of the firm’s funds when they actually invested only $25,000 each, the statement said. Frumento denies that Brittenham ever made such claims.
The charges announced Tuesday by the SEC are not the first time Clean Energy has been accused of misallocating expenses. In 2011, an individual representing a group of Clean Energy investors accused Clean Energy of securities fraud, but a Federal District court found the firm’s expenses were proper and were consistent with the partnership agreements, according to Frumento.
Clean Energy invests in lower mid-market companies in the biofuels, agribusiness and renewable chemicals sectors in the Midwest region of the US.
Expensing “questionable” costs has been a common practice at some private equity firms for a long time, one investor source told PEI last October.
“Do they take advantage of it? Of course,” the source said. “I think you would be shocked.”
One example involves executives with private jets, which they use for both business and personal travel. According to research from ACA Compliance Group, 30 percent of private equity firms charge all costs of private jet travel to the fund, while 35 percent charge a first-class ticket equivalent when jetting around the world, PEI previously reported.
Recent ACA research suggests that half of private equity firms do not have formal policies to ensure only reasonable expenses are charged to limited partners.