On September 5, 2023, the Securities and Exchange Commission (“SEC”) settled charges against Prime Group Holdings LLC (“Prime Group”), a private equity firm focused on alternative real estate assets, relating to millions of dollars of earned real estate broker fees paid to an affiliated brokerage firm, which was wholly-owned by Prime Group’s CEO.
Key Takeaway(s): Potential conflicts, in this case payments made to affiliates, are paramount to investor decision-making and therefore must be clear, accurate and adequate.
Facts
Prime Group is the sponsor of Prime Storage Fund II, LP (the “Fund”) which was formed to purchase self-storage facilities across North America primarily in non-auction sale processes. Prime Group utilized employees and independent contractors to find and acquire these “off-market” properties. The costs and compensation of these individuals were paid, in part, through a 3% brokerage fee received by a Prime Group affiliate. Prime Group’s affiliate received fees on the majority of the Fund’s transactions. These brokerage fees were ultimately paid by the Fund as part of the property acquisition.
According to the Settlement Order, the SEC alleged the Fund’s LPA, PPM and Due Diligence Questionnaire all contained misleading statements and omissions concerning fees and conflicts of interest which were material to investors and prospective investors. For example:
- The LPA stated the “General Partner may, from time to time, engage any person to render services to the Fund.” Continuing “Person so engaged may be affiliates…”
- In the “Other Fees” section of the PPM, Prime Group disclosed a 1% acquisition fee charged on all transactions and 5% property management fee paid to an affiliate, but failed to disclose the 3% brokerage fee.
- The Fund’s PPM said “Fund II will pay all expenses related to its operations including certain costs and expenses directly related to the purchase of a Property Investment by the Fund (including third party brokerage fees, commissions, and transfer taxes…”
- The Fund’s PPM, Generic DDQ and investor-provided DDQs either stated there were “no significant conflicts of interest” or Prime Group failed to include information about the affiliate and brokerage fees paid.
Over a four year period affiliate received nearly $18 million in brokerage fees from the Fund’s investment activity which was used to fund Prime Group’s sourcing activity and compensate the individuals responsible for sourcing the properties.
Penalties
In addition to the reputational damage done, Prime Group agreed to cease and desist from further violations and to pay $20.5 million in penalties, disgorgement and interest.