Private-equity firm Fenway Partners, its CFO, and three other executives have agreed to pay $10.2 million to settle charges they failed to disclose conflicts of interests arising out of transactions with an affiliated consulting company.
The U.S. Securities and Exchange Commission said Tuesday in an administrative order that Fenway did not inform a fund client that certain portfolio companies paid $5.74 million in fees to Fenway Consulting Partners, which was principally owned by Fenway principals Peter Lamm and William Gregory Smart and former principal Timothy Mayhew Jr.
The payments followed the termination of management services agreements under which the portfolio companies had paid monitoring fees to Fenway Partners. Those fees were offset against the advisory fee paid to Fenway by the fund client but the fees paid to Fenway Consulting were not offset.
“Fenway Partners and its principals failed to tell their fund client that they rerouted portfolio company fees to an affiliate, and avoided providing the benefits of those fees to the fund client in the form of management fee offsets,” Andrew J. Ceresney, director of the SEC Enforcement Division, said in a news release.
“Private equity advisers must be particularly vigilant about conflicts of interest and disclosure when entering into arrangements with affiliates that benefit them at the expense of their fund clients or when receiving payments from portfolio companies,” he added.
The SEC’s investigation also found that Lamm, Smart, and CFO Walter Wiacek asked fund investors to invest $4 million in a portfolio company without disclosing that $1 million would be used to pay Fenway Consulting.
Additionally, the SEC said, Mayhew and two Fenway Consulting employees received $15 million in incentive compensation from the sale of a portfolio company for services that they had almost entirely provided when they were Fenway Partners employees.
The settlement includes disgorgement of $7.892 million, prejudgment interest of $824,471, and penalties totaling $1.525 million.
The SEC has been cracking down on how private-equity firms allocate and disclose various kinds of fees, fining Blackstone Group $39 million in October and Kohlberg Kravis Roberts $30 million in June.