Among recent enforcement actions were SEC charges against an equity fund manager over misallocation of expenses. Also, FINRA censured and fined a firm $130,000 for short position reporting failures.
Equity Fund Manager, Firm Charged With Expense Misallocation
The SEC filed charges against Scott Brittenham and Clean Energy Capital LLC (CEC) in Arizona for putting together a scheme to misallocate fund expenses.
According to the SEC, Brittenham and his firm improperly paid more than $3 million of the firm's expenses by using assets from 19 private equity funds that invest in private ethanol production plants. They also failed to mention that payment arrangement in fund offering documents.
When the money ran out to pay expenses, CEC and Brittenham loaned money to the funds — at rates favorable to themselves — and unilaterally changed how they calculated investor returns to benefit themselves.
Among the expenses the funds have been footing are such things as the firm's rent, salaries, and other employee benefits such as tuition costs, retirement contributions and bonuses. Brittenham also used fund assets to pay 70% of a $100,000 bonus that he awarded himself. All this was in addition to millions in management fees that the funds were already paying to CEC.
As cash reserves shrank under this arrangement, CEC and Brittenham made "loans" to the funds — with interest rates as high as 17% — so that they could keep using fund money to pay expenses. That put the funds in jeopardy, since Brittenham had pledged fund assets as collateral.
But neither Brittenham nor the firm stopped there; they changed how the firm calculated distributions to investors so that they could pay out less. Brittenham also lied to one investor about how much "skin in the game" he had, claiming that he and CEC's cofounder had each invested $100,000 of their own money in one of the funds. The actual amounts invested were only $25,000 each.
Among the charges filed by the SEC are willfull violations of the antifraud provisions of the federal securities laws, along with disclosure, compliance, custody and reporting violations.
FINRA Censures, Fines Firm on Short Position Violations
