On January 10, 2025, the SEC settled charges against two related private equity fund managers and the managers’ CEO for improperly charging expenses to private funds advised by the managers and failing to disclose the resulting conflicts of interest.
Key Takeaways
Charging clients expenses that have not been disclosed or otherwise approved will not pass regulatory scrutiny. Silence in a fund’s governing documents does not equate to permission. If a fee or expense is not explicitly permitted, consider it impermissible without further approval or disclosure.
Background
The managers, One Thousand & One Voices Management, LLC (“Manager A”) and Family Legacy Capital Credit Management, LLC (“Manager B”) (collectively the “Managers”), and Hendrik F. Jordaan (“Jordaan”), the Managers’ CEO, advised two private equity funds, One Thousand and One Voices Africa Fund I, L.P. and Families Backing Families Credit Fund I, L.P. (the “Funds”).
According to the facts in the SEC’s Cease-and-Desist Order between 2019 and 2023 the Managers and Jordaan (i) charged the Funds for expenses that were not permitted under the governing documents and failed to disclose the resulting conflicts of interest or (ii) submitted invoices to the Funds without taking reasonable steps to confirm that the Funds should have paid such invoices. As a result of these actions the Funds overpaid the Managers.
The impermissible expenses included outsourced financial services, public relations services, and legal fees, none of which were included in the governing documents as permitted fund expenses and, which should have been paid by either the Managers or Jordaan. The Managers either had the Funds pay these expenses directly from the Funds’ bank accounts or paid the expenses themselves and then invoiced the Funds for reimbursement.
Additionally, the Managers submitted invoices to the Funds without taking reasonable steps to ensure the Funds owed the money. The Managers submitted expenses to the Funds, the payment of which the Managers themselves or Jordaan in his capacity as CEO approved on behalf of the Funds, with generic descriptions, such as (i) invoices for “Various Expenses” or “Expense Reimbursement” (and nothing more); and (ii) invoices “[d]ue to management Co.” (and nothing more). The generic expense amounts invoiced to the One Thousand and One Voices Africa Fund I, L.P. totaled more than $2.4 million.
Jordaan also charged the majority of his living and business expenses directly Manager A-issued corporate credit cards and provided Manager A-issued corporate credit cards to his family members. Between April 2019 until May 2020, Manager A also submitted approximately $500,000 in generic invoices to the One Thousand and One Voices Africa Fund I, L.P. for credit card reimbursement, with no back up or further description.
Finally, Jordaan charged costs associated with certain personal travel with his wife and other family members to his One Thousand and One Voices Manager corporate credit card and improperly allocated these expenses to the One Thousand and One Voices Fund.
Penalties
Manager A and Jordaan agreed to pay $1,522,572 and prejudgment interest of $272,222, for a total of $1,794,794. The amount owed was deemed satisfied by the elimination of an accrued but unpaid balance owed by the One Thousand and One Voices Fund to Manager A. Additionally, Manager A and Jordaan agreed to pay a civil money penalty of $150,000 to the SEC.
How Trillium Can Help
Testing
A key component of Trillium’s ongoing compliance support is reviewing your firm’s practices in key risk areas against policies and procedures and disclosures. The ability to identify and rectify problematic areas prior to an examination has the ability to prevent significant time and expense later on.
Disclosure Practices
By building a close partnership, Trillium helps identify idiosyncratic areas of risk and helps firms manage, mitigate and disclose conflicts of interest.