A private equity manager fraudulently channeled $3m of fund capital into his firm’s expenses to pay bonuses, employee tuition fees and pensions according to charges brought by the US securities regulator.
The SEC claims Clean Energy Capital CEO Scott Brittenham (pictured below) tapped 19 private equity funds under his management for the cash, which was supposed to be used to invest in ethanol production plants.
It alleges that when the funds ran out of cash to pay the firm’s expenses, CEC and Brittenham loaned money to the funds at unfavourable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.
Marshall Sprung, co-chief of the SEC enforcement division’s asset management unit, said, “Brittenham betrayed investors in the funds he managed by burdening them with more than $3m in expenses that his firm should have paid and the funds could not afford.
“Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors.”
The SEC’s order instituting administrative proceedings claims that among the expenses CEC and Brittenham had misallocating to the funds were CEC’s rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses.
It said that Brittenham even used fund assets to pay 70 per cent of a $100,000 bonus he awarded himself.
The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.
The SEC’s order said the expense misallocation scheme shrank the funds’ cash reserves so much that CEC and Brittenham made unauthorized ‘loans’ to the funds at “exorbitant” rates of up 17 per cent in order to continue paying the improper expenses with fund assets.
It added that the loans jeopardized the funds because Brittenham had pledged fund assets as collateral.
CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money, the report says.
The SEC also alleged Brittenham lied to a fund investor about his ‘skin in the game,’ claiming that he and CEC’s co-founder had each invested $100,000 of their own money in one of the funds when the actual amounts were only $25,000.
CEC, which has been active since 2003, invests in the biofuels, renewable chemicals, biomass, and agribusiness sectors.
It is invested in East Kansas Agri-Energy, Granite Falls Energy, Advanced BioEnergy (South Dakota), E Energy Adams, Highwater Ethanol, First United Ethanol, and has exited investment in Advanced BioEnergy Fairmont, and Ethanol Grain Processors.
Earlier this year the SEC charged a Manhattan-based private equity manager and his firm with stealing $9m from LPs, treating their assets “as his own personal and professional slush fund”.
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