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From Securities Regulation Daily, November 3, 2015

SEC charges private equity firm for failing to disclose conflicts of interest

By Jacquelyn Lumb

The SEC has announced charges against private equity firm Fenway Partners LLC and four of its executives for failing to disclose conflicts of interest arising from transactions involving payments from fund assets or portfolio companies to an affiliated consulting company. Private equity firms have been an area of focus by the Division of Enforcement’s asset management unit over the last couple of years (In the Matter of Fenway Partners, LLC, Release No. 40-4253, November 3, 2015).

In a news conference following the announcement of the charges, Enforcement Director Andrew Ceresney said the Fenway case was significant because it is the first action against a private equity firm and individuals for failing to disclose conflicts of interest regarding consulting services provided by an affiliated entity and paid for by fund and portfolio company assets. It is also the first case involving payments to a private equity firm’s former employees. Ceresney said the case highlights that in appropriate circumstances, individuals associated with an investment adviser will be held accountable for failing to fully and fairly disclose conflicts of interest to clients.

Fenway Partners serves as the investment adviser to Fenway Partners Capital Fund III, L.P. (Fund III), a private equity fund. Fenway Partners entered into management services agreements with Fund III’s portfolio companies. The management fees were offset against the advisory fee paid by Fund III to Fenway Partners.

Change in service agreements. Fenway Partners, principals Peter Lamm and William Smart, former principal Timothy Mayhew Jr., and CFO Walter Wiacek caused certain portfolio companies to terminate their payment obligations to Fenway Partners and to enter into agreements with Fenway Consulting Partners, LLC, an entity that was affiliated with Fenway Partners and principally owned and operated by Lamm, Smart and Mayhew. The services were substantially the same and often conducted by the same employees as under the previous management services agreements. Mayhew was involved with only one of the portfolio companies.

Fenway Consulting received $5.74 million from the portfolio companies during the relevant period. Unlike under the previous agreements, the fees were not offset against the Fund III advisory fee, resulting in a larger advisory fee to Fenway Partners. The respondents did not disclose the conflict of interest and they made material omissions about the consulting agreements.

Related party transactions. In addition, Fenway Partners, Lamm, Smart and Wiacek asked fund investors to provide $4 million in connection with an investment in a portfolio company without disclosing that $1 million would go to Fenway Consulting. Mayhew and two former Fenway Partners employees also received $15 million in incentive compensation from the sale of a portfolio company for services they provided while employed by Fenway Partners. The payments were not disclosed as related party transactions in the financial statements that were provided to investors.

Sanctions. The respondents settled the charges without admitting or denying the SEC’s findings. Fenway Partners, Lamm, Smart, and Mayhew agreed to jointly and severally pay disgorgement of $7.892 million and prejudgment interest of $824,471. The respondents also paid a total of $1.525 million in penalties. The funds will be distributed to harmed investors.

Ceresney reminded private equity partners that they must be vigilant about conflicts of interest. Personnel will be held accountable for failing to disclose conflicts and will be subject to substantial disgorgement and penalties, he advised. He also reported that there are more of these cases in the pipeline.

Companies: Fenway Partners LLC; Fenway Partners Capital Fund III, L.P.

The release is No. 40-4253.

MainStory: TopStory InvestmentAdvisers Enforcement PrivateEquityNews

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