New York AG Sues Manager for Fraud, Fiduciary Failure

New York Attorney General Letitia James. (Photo: Diego Radzinschi/ALM)

Investment advisor and private equity fund manager Laurence G. Allen has been sued by New York Attorney General Letitia James for using investor funds to bolster up his flailing parent firm, NYPPEX. The lawsuit, filed in state Supreme Court in New York County, alleges repeated and ongoing violations of defrauding investors and misappropriating more than $13 million to enrich himself and his companies between 2008 and 2018.

The complaint revolves around Allen's private equity fund ACPX, fully owned by Allen's investment advisor, ACP Investment Group, both based in Rye Brook, New York. He launched ACPX in 2004 as a fund of funds to invest in other private equity funds at a discount on the secondary market. Originally it had 75 clients.

Allen claimed to use his broker-dealer, Relief Defendant NYPPEX, a company controlled through parent NYPPEX, to help target potential investments. However, "Allen began funneling investor money from [ACPX] into NYPPEX and, in turn, into his own pockets," when the firm's parent ran into trouble, according to the AG.

"The lawsuit highlights the greed and hubris a single individual presented by allegedly using other people's savings as his personal piggy bank and as a tool to prop up his failing business," James said in a statement.

According to the complaint, Allen began funneling approximately $5.7 million of ACP's assets into NYPPEX while he "pocketed" the same amount in salary. These actions were "contrary" to the private placement memorandum and partnership agreement and "were made with almost no prospect of ever earning a return," the AG's office stated, which added that NYPPEX continued to lose money and stayed afloat only by infusions from the private equity fund. The complaint stated:

"Notwithstanding the Company's losses, inability to generate profit-sustaining income, and failure to create an online trading platform, Allen awarded himself annual compensation from NYPPEX that regularly exceeded $400,000 and has reached more than $900,000 in recent years. For example, in 2016, Allen paid himself $909,000 from NYPPEX, although that same year the Company generated revenues of only $2.3 million and incurred $870,000 in operating losses."

In addition, he allegedly diverted $3.4 million in carried interest and improperly paid for the day-to-day business expenses of the fund and BD.

Bad Advice

Allen also is accused of telling investors that investments in NYPPEX had been "vetted and endorsed by an investment committee, where in fact no such committee existed," states the AG. He also, alleges the AG's office, created "unreasonable and improbably valuations for NYPPEX that artificially inflated the overall value of the fund, which he reported to investors."

Further, he is accused of delaying distribution of reports and audited financial records to investors, as well as "encouraged investors to vote in favor of amendments to the original partnership agreements between his firm and investors by using false and misleading disclosures intended to deceive those investors."

In fact, when some investors asked for the general partner to buy them out, Allen stated that they couldn't because it was a private equity partnership, not a hedge fund, according to the complaint. However, when one investor complained and said he would report Allen to authorities, Allen bought him out. When another investor asked about valuation, Allen reprimanded him for taking Allen's time away from the company. And when the auditor pushed on valuations, Allen's response was, "These audits are just taking up too much of our time."

Knowing that he was under investigation, Allen continued these offenses. "Since learning of the OAG's investigation, Allen has invested at least another $1.7 million of [ACPX] capital into NYPPEX, used at least $1 million from [ACPX] to pay operating expenses for NYPPEX, and, in April 2017, improperly distributed more than $1.6 million in carried interest to himself and entities he controls," the attorney general's office contends.

Further, states the AG, none of the current clients of the fund have received the full return of their cumulative $17 million in capital contributions nor any portion of the $10 million in accrued, but unpaid preferred return due to them.

As of December 2018, Allen had failed to comply with any investigative subpoenas, stated the OAG. As a result, the OAG obtained a restraining order, which apparently Allen ignored and according to the OAG, he continued to solicit funds for NYPPEX to outside investors without disclosing the current OAG investigation. "Allen also apparently asked investors to sign affidavits with significant factual misstatements and misrepresentations in an attempt to absolve himself of responsibility for his actions," the OAG said.

In addition to charges of equities fraud, repeated illegal actions, and breach of fiduciary duty, the OAG seeks to continue the preliminary injunction as well seeks a disgorge of profits as well as an appointment of a receiver to take control of ACPX and investment advisor assets, and to wind down the funds.

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