Securities Law & Corporate Counsel Blog

As an Arizona-based private equity fund and its manager discovered at the end of February 2014, paying one’s expenses with client’s assets is both problematic and liable to receive prosecution by the Securities and Exchange Commission (“SEC”). Clean Energy Capital, LLC (“CEC”) and its private equity fund manager Scott Brittenham were issued charges by the SEC on February 25, which detailed how $3 million of the fund’s expenses were paid “improperly” with assets from 19 funds that invest in private ethanol production plants.Disclosure issues, along with interest-rated loans offered back to clients when the funds ran out of money for CEC’s expenses, underlie the broader misallocation charges in this case. According to the SEC, CEC and Brittenham failed to disclose “any such payment arrangement [to pay the fund’s expenses] in fund offering documents,”thereby masking the misallocation of funds to their constituent clients. In addition, by using fund assets towards fund expenses, CEC’s overall cash reserves diminished, which led to Brittenham and CEC forcing unauthorized “loans”onto their fund clients, with interest rates as much as 17 percent attached to them. CEC’s expenses that were paid by the misallocated fund assets included “rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses”, with part of the funds used towards paying a reported $100,000 bonus to Brittenham himself on top of the “millions more” [in] “management fees”that the funds also paid to CEC. This sustained misrepresentation of the fund’s true assets, as well as its back-handed efforts to recover funds through high-interest loans to its clients ( with fund assets being pledged as collateral to the loans), represent a particularly egregious example of insufficient disclosures, fraud, and securities law violations involving “ compliance, custody and reporting.”For further information on this and other related subjects, please contact us at [email protected]  or (619) 298-2880.