Lincolnshire Management, a New York-based private equity fund advisor, has agreed to pay more than $2.3 million in fines and penalties after the Securities and Exchange Commission charged it for breaching its fiduciary duties.
The case related to acquisitions Lincolnshire made 17 years ago.
One of the firm's private equity funds — Lincolnshire Equity Fund — purchased one company in 1997 while another of the firm's funds — Lincolnshire Equity Fund II — purchased another company four years later.
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Ultimately, Lincolnshire disclosed to investors in both funds that it intended to integrate the two companies because of their potential synergies.
The two companies, which were not named in an SEC news release, integrated their payroll and 401(k) administration, human resources management, marketing and their technology programs. They formed a joint management team, entered into joint lines of credit, and even had a joint logo, according to the SEC.
But the SEC said that from at least 2005 to January 2013, the two companies each paid annual consulting fees of $250,000 to Lincolnshire, in spite of being largely integrated.
And while each company was required to pay a share of various expenses relative to their share of the combined revenues, the SEC found that there times when portions of the shared expenses were misallocated, giving one fund company an unfair advantage over the other.
Other times, expenses were not documented. One company paid the entire expense to manage the combined 401(k) plan. And one of the companies paid the entire expense to manage combined payroll costs. Also, one of the companies did not pay its share of overhead costs for a subsidiary.
And several employees did work that benefited both of the companies, but the cost to compensate those employees was not evenly shared.
Ultimately, the two companies were sold together in 2013. The SEC also found that the cost to compensate executives after the sale was not evenly shared by each company.
On top of Lincolnshire Management's systemic inconsistencies in managing equitable cost sharing, it also found the firm failed to adopt and implement policies and procedures that could have prevented the violations.
While it's not illegal for two portfolio companies to be integrated from different private equity funds, the private equity advisers have a fiduciary obligation to their investors to assure the companies evenly share the cost of their expenses.
"Advisers that commingle assets across funds must do so in a manner that satisfies their fiduciary duties to each fund and prevents one fund from benefitting to the detriment of the other," said Julie Riewe, co-chief of the SEC enforcement division's asset management unit.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
