SEC Charges Private Equity Firm and Four Executives With Failing to Disclose Conflicts of Interest

The Securities and Exchange Commission today announced that a New York-based private equity firm and four executives have agreed to settle charges that they failed to disclose conflicts of interest to a fund client and investors when fund and portfolio company assets were used for payments to former firm employees and an affiliated entity.

An SEC investigation found that Fenway Partners LLC, principals Peter Lamm and William Gregory Smart, former principal Timothy Mayhew Jr., and chief financial officer Walter Wiacek weren’t fully forthcoming to the client and investors about several transactions involving more than $20 million in payments out of fund assets or portfolio companies to an affiliated entity for consulting services and to Mayhew and other former firm employees for services they primarily provided while still working at Fenway Partners.

“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,” said Andrew J. Ceresney, Director of the SEC Enforcement Division. “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.”

Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “Fenway Partners and its principals breached their fiduciary obligation to fully and fairly disclose conflicted arrangements to a fund client, and compounded the breach by omitting material facts about the arrangements when communicating with fund investors.”

According to the SEC’s order instituting a settled administrative proceeding:

• Fenway Partners entered into contracts with certain portfolio companies held by Fenway Capital Partners Fund III L.P. under which the companies paid fees to Fenway Partners that were offset against the management fees the firm earned from the fund. 
• Beginning in December 2011, Fenway Partners and the four executives caused certain portfolio companies to terminate their payment obligations to Fenway Partners and enter into consulting agreements with an affiliated entity named Fenway Consulting Partners LLC.
• Fenway Consulting Partners provided similar services to the portfolio companies often through the same employees, but the fees paid to Fenway Consulting Partners (totaling $5.74 million) were not offset against the management fees that the fund paid to Fenway Partners.
• 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 be used to pay Fenway Consulting. 
• Fenway Partners, Lamm, and Mayhew caused Mayhew and two former Fenway Partners employees to receive $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. 
• Fenway Partners also failed to disclose these payments as related party transactions in the financial statements they provided to investors.

To settle the SEC’s charges without admitting or denying the order’s findings, Fenway Partners, Lamm, Smart, and Mayhew agreed to jointly and severally pay disgorgement of $7.892 million and prejudgment interest of $824,471.10.  They and Wiacek also agreed to pay penalties totaling $1.525 million. The total amount of $10,241,471.10 will be placed into a fund for harmed investors. 

The SEC’s investigation was conducted by Mark D. Salzberg and Gregory Maccordy of the Asset Management Unit along with Kevin McGrath, Neal Jacobson, and Lisa Knoop of the New York Regional Office.  The case was supervised by Panayiota K. Bougiamas of the Asset Management Unit.