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Proskauer on Private Fund Litigation

Category Archives: Disputes

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What Fund Managers Need to Know About Price Gouging Laws

A new and unprecedented investment environment has been created during the current COVID emergency as every state that has price gouging laws on its books has activated them, and states without official statues are regulating prices by executive order or existing consumer protection and unfair trade practice laws. Never before have price controls been active … Continue Reading

Misuse of Private Fund Assets Leads to SEC Enforcement and Industry Bar for Fund Manager

In a cautionary tale about the career-limiting risks of SEC sanctions, a private fund adviser and its owner were found to have misused over $1 million of fund assets, resulting in a bar from the investment industry as well as a civil penalty. Monsoon Capital, LLC (Monsoon) is an SEC-registered investment adviser founded and owned … Continue Reading

Private Equity and Cybersecurity: Threats, Consequences, and the Regulatory Framework

Cybersecurity breaches and threats are pervasive concerns for any entity storing valuable data or managing large sums of money: private investment funds are no exception.  Recently three private equity firms suffered breaches that compromised their email accounts and wire transfers, resulting in $1.3 million in losses.  We have seen the SEC follow through on its … Continue Reading

COVID-19: Heightened Potential for General Partner Clawbacks (and Disputes)?

We at The Capital Commitment blog have previously discussed several steps for fund managers and others to weather the storm brought by COVID-19.  One of those steps is assessing the likelihood of a carried interest return obligation under a fund agreement’s general partner clawback provision (and planning for how to mitigate those obligations, if necessary).  … Continue Reading

Who Foots the Bill? SEC Cracks Down on Operating Partner Reimbursement Disclosures

The SEC has been active in the private equity space recently after being relatively quiet for some time. A recent enforcement action serves as a reminder for fund sponsors that regulators are continuing to look at fund sponsors’ practices relating to “operating partners,” particularly in the context of disclosures to limited partners.… Continue Reading

Rear View Mirror: Criminal Exposure for Companies that Received PPP Loans Under the CARES Act

On April 28, 2020, Treasury Secretary Mnuchin announced that companies that received loans of more than $2 million through the Paycheck Protection Program (“PPP”) of the CARES Act will be closely scrutinized. Mr. Mnuchin noted that the Small Business Administration (“SBA”) would audit the business to determine whether the certifications submitted in connection with the … Continue Reading

Vice Chancellor Veers Away from Delaware Section 220 Precedent

Last year, we highlighted the risks of filing a Section 220 books and records request post-litigation, citing a case where the Delaware Chancery Court found that such use was an improper attempt to “sue first, ask questions later.” Recently, the Delaware Chancery Court opined on this issue again in Lebanon County Employees’ Retirement Fund v. … Continue Reading

U.S. Supreme Court Denies Bid to Review Dismissal of Challenge to Pay-To-Play Rule

On January 13, 2020, the United States Supreme Court denied certiorari to an appeal of a June 2019 order from the United States Court of Appeals for the D.C. Circuit that dismissed an action seeking to invalidate certain under the First Amendment, among other arguments. This denial leaves in place a ruling in favor of … Continue Reading

Top Ten Regulatory and Litigation Risks for Private Funds in 2020

The private fund industry is more in the public eye than ever before.  Private capital and private markets have experienced massive growth over the last two decades, substantially outpacing the growth of public equity. We have witnessed that trend continue during the past year, and have worked with our clients to navigate the greater uncertainty … Continue Reading

First Circuit Reverses District Court’s “Partnership-in-Fact” Holding and Finds Private Equity Funds Not Part of Controlled Group and Not Liable for Portfolio Company’s Pension Liabilities

Last Friday, the U.S. Court of Appeals for the First Circuit ruled that two co-investing Sun Capital private equity funds had not created an implied “partnership-in-fact” for purposes of determining whether the Sun Funds were under “common control” with their portfolio company, Scott Brass, Inc. (SBI) – resulting in a ruling that the Sun Funds … Continue Reading

Proskauer Private Investment Funds Group Releases 2019 Annual Review and Outlook

Proskauer’s Private Investment Funds Group recently released its 2019 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds. This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge funds space, as well as certain … Continue Reading

SEC Releases FY 2019 Enforcement Results: Increases in Investment Adviser Actions and Maintained Focus on Individual Accountability

Yesterday the SEC announced its enforcement results for FY 2019, accompanied by a report from the Co-Directors of its Division of Enforcement.  While the total number of actions increased slightly from 2018, the percentage of cases involving investment advisers or investment companies increased more dramatically, growing from 22% in 2018 to 36% in 2019, with … Continue Reading

New York Establishes Six-Year Statute of Limitation for Prosecution of Claims under the Martin Act

On August 25, 2019, New York Governor Andrew Cuomo signed New York State Senate Bill S6536 which established a six-year statute of limitations for the prosecution of certain crimes related to fraudulent practices in respect to stocks, bonds and other securities and conducting business in the State of New York. As discussed below, the legislation … Continue Reading

Veil-Piercing Risks for Private Equity Managers Highlighted in Recent Court Decision

A recent case in a North Dakota district court is a reminder to private equity funds and managers that, under certain conditions, they may be held responsible for actions of a fund’s portfolio companies.  Courts allow plaintiffs to pierce the corporate veil as a check against improper abuse of the corporate form.  When one corporate … Continue Reading

Third Circuit Discusses Important Differences Between Board Observers and Directors

The Third Circuit recently issued an important decision for private fund advisors who serve on corporate boards.  In a precedential decision on a matter of first impression, the Third Circuit distinguished the role of nonvoting board observers from the function of formal corporate directors.  And while the decision was issued in the context of liability … Continue Reading

Proskauer Launches Private Equity SEC Enforcement Tracker

Today, we are launching a proprietary database tracking all SEC enforcement actions involving private equity advisers. The tracker contains key information from the actions, including summaries of key issues, settlement terms, and relevant statutory provisions. The tracker will be an important resource for us and our clients, providing us with quick access to comparable cases … Continue Reading

SEC Fines Fund Manager $5 Million Over Undervaluation of Assets

A recent action where the SEC focused on the presumably conservative undervaluation of assets suggests that it is more than willing to use valuation as a hook to deter “smoothing” of returns. As we previously noted, while the SEC consistently announces that valuation is a “key area of focus,” it is uncommon for regulators to … Continue Reading

DC Circuit Opinion Reaffirms Fiduciary and Disclosure Obligations of Advisers While Rejecting SEC Finding of “Willful” Violations

The DC Circuit recently released an opinion addressing the SEC’s administrative findings against registered investment adviser The Robare Group (TRG) for failure to disclose alleged conflicts of interest. Although the court affirmed the SEC’s finding of a violation of Section 206(2) of the Advisers Act, it held that Commission could not find willful violations under … Continue Reading

Rent the Runway Walks into the Litigation Spotlight

There’s a new unicorn in town, and this time, it isn’t just another tech company. Rent the Runway, also known as RTR, is now officially valued at over $1 billion after its most recent funding round which raised $125 million. The high-end rental clothing brand was launched in 2009 by female founders, including co-founder and CEO Jennifer … Continue Reading

Fraud Claims Against Startup Founder Involving Secondary Market Sales Demonstrate SEC Focus on Privately-Held Companies

Last week the SEC announced a settlement of fraud claims against the founder of Jumio, Inc, a private mobile payments company, for misstating the company’s financial results and using those financials to sell his company shares on the secondary market.  This case is a reminder that privately negotiated securities transactions and private, VC-funded companies are … Continue Reading

Delaware Chancery Declines Post-Filing Use of Section 220 Books and Records Inspection Request

A recent decision by the Delaware Chancery Court suggests that a litigant might forego the ability to file a books and records request if it waits to do so until after the lawsuit is filed. Last month the Delaware Chancery Court dismissed just such an action, characterizing the request for a books and records inspection … Continue Reading

The Top Ten Regulatory and Litigation Risks for Private Funds in 2019

An increasingly sophisticated and active OCIE division, innovative market disruptors, a maturing credit cycle, and a philosophical change in how the private fund industry views and utilizes litigation are likely to lead to increased regulatory scrutiny and litigation risk for advisers (and their funds) in 2019.  With that backdrop, we are pleased to present our … Continue Reading

Valuation of Illiquid Securities as a Focus of Recent Enforcement Actions

While the SEC consistently announces that valuation is a “key area of focus,” it is uncommon for regulators to “second guess” valuation determinations in the absence of other potential violations. However, recent actions would suggest that the SEC is particularly interested in the valuations and methodologies behind illiquid securities. As we have noted here before, … Continue Reading

2018 Annual Review and 2019 Outlook Highlights Private Equity Fund Litigation Risk Areas

In our recently released 2018 Annual Review and 2019 Outlook for Hedge Funds, Private Equity Funds and Other Private Funds, we note that innovative market disruptors, a maturing credit cycle, and a philosophical change in how the industry views and utilizes litigation are likely to lead to increased litigation risk for advisers (and their funds) … Continue Reading
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