by T. GormanPosted on Posted in SECActions

Conflicts of interest and a failure to disclose related party transactions continue to be key themes in Commission actions involving investment advisers. Undisclosed conflicts, as well as a failure to disclose related party transactions, were at the center of a proceeding brought against a registered investment adviser and its affiliates. In the Matter of Fenway Partners, LLC, Adm. Proc. File No. 3-16938 (November 3, 2015).

Fenway Partners, a Commission registered investment adviser, serves as the adviser to three private equity funds, including Fenway Partners Capital Fund III, L.P. Respondents Peter Lamm and William Smart served as Managing Directors, and had an ownership interest in, the adviser. Respondent Timothy Mayhew was also a Managing Director until his resignation in May 2012 when he joined Fenway Consulting Partners, LLC, an affiliate largely owned by Messrs. Lamm, Smart and Mayhew. Respondent Walter Wiacek served as Vice President, CFO and COO of Fenway Partners.

Fund III had investors which included pension funds, life insurance companies and large institutional investors. Pursuant to its organizational documents – a PPM, Limited Partnership Agreement and Investment Advisory Agreement — the firm operated under an Advisory Board consisting of Limited Partner representatives who were independent.

Fenway Partners had entered into agreements with Portfolio Companies under which monitoring fees were paid. Those monitoring fees were 80% offset against the advisory fee paid by Fund III. In December 2011, however, Respondents caused four Fund III Portfolio Companies to terminate the agreements under which monitoring fees were paid. Those agreements were then replaced with Consulting Agreements with Fenway Consulting, an affiliate of Fenway Partners. The payments under those agreements were not offset against the Fund III management fees, although the services were largely similar. The Fund III Advisory Board was not informed of the conflict at the time the arrangements were approved. Nor were the arrangements disclosed as related party transactions. Under the agreements Fenway Consulting was paid $5.74 million.

In January 2012 Fenway Partners sent a capital call notice to the Limited Partners regarding Portfolio Company A. The notice requested $4 million to invest in the firm’s securities for capital improvements. Fund III only used $3 million for the securities while $1 million went to pay Fenway Consulting under a consulting agreement executed at the same time as the capital call. The $1 million payment was not disclosed to the Limited Partners in the capital call notice.

Finally, Respondents failed to disclose the conflict in a June 2012 transaction in which Fund III sold its equity interest in a second Portfolio Company, Company B. Mr. Mayhew and two former Fenway Partners were included in the Company B cash incentive plan. As part of the sales transaction the men were paid $15 million under the cash incentive plan from the sale proceeds, reducing the amount received by Fund III. That amount was paid almost entirely for services performed while the men were employees of Fenway Partners. Respondents Fenway Partners, Lamm and Smart also made, and Respondent Wiack made or caused to be made, material omissions to investors concerning the cash incentive plan payments.

The Order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure except Mr. Wiack who was not censured. In addition, each of the Respondents, except Mr. Wiack, will, on a joint and several basis, pay disgorgement in the amount of $7,892,000 and prejudgment interest. Each Respondent will pay a civil penalty of: $1 million by the adviser; $150,000 each by Messrs. Lamm, Smart and Mayhew; and $75,000 by Mr. Wiacek.

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by T. GormanPosted on Posted in SECActions

The SEC filed an insider trading action in which the tipper partially settled the action. While the complaint alleged that the tippee knew of the breach of duty and that the information was gifted to him by his romantic partner, he did not settle. SEC v. Spivak, Case No. 1:15-cv-13704 (D. Mass. Filed November 2, 2015).

Defendant Shirmila Doddi was employed as a financial analyst in the commercial banking group of Wells Fargo Bank, N.A. Defendant Vlad Spivak is unemployed but day trades.

This action centers on the acquisition of American Dental Partners, Inc. by JLL Partners, Inc., announced on November 7, 2011. American Dental provides management services to dental group practices. JLL is a private equity fund.

The transaction began in March 2011 when representatives of Wells Fargo Securities met with American Dental regarding the possibility of a merger and acquisition. The firm was interested in acquisitions but did not view itself as a target. Two months later Ms. Doddi was assigned by Wells Fargo Bank – an affiliate of Wells Fargo Securities – to be the financial analyst for American Dental.

Early in 2011 Ms. Doddi met Mr. Spivak at a dance club. A self-described day trader, he frequently discussed different stocks with her. Over time their romantic relationship grew. Mr. Spivak also repeatedly requested inside information, noting that insider trading was “not a big deal and that individuals rarely get caught,” according to the complaint.

In September 2011 the investment bankers prepared a presentation for American Dental. The materials were sent to Ms. Doddi in a September 26, 2011 email. The next month she received an email from the bank’s relationship manager for American Dental stating that the CFO of the company told him the firm would be acquired by JLL Partners for $20 per share. The announcement was scheduled for early November 2011.

While Ms. Doddi repeatedly refused to provide her Mr. Spivak with inside information, between October 6, 2011 and October 13, 2011 she told him about the possibility of the American Dental merger. On October 13, 2011, less than an hour after receiving an email from the bank relationship manager confirming the deal, Ms. Doddi sent a text to Mr. Spivak confirming that the transaction was going forward. Mr. Spivak knew, or should have known, that the information had been furnished in breach of Ms. Doddi’s duty to her employer.

Ms. Doddi did not trade based on the information. Rather, the complaint states that “in tipping Spivak, she conferred a gift upon a romantic partner.” Mr. Spivak purchased 17,100 shares of American Dental in three accounts in his name and an additional 8,000 shares through his mother’s account. Following the deal announcement he sold the shares at a profit of $222,357.

The complaint alleges violations of Exchange Act Section 10(b). Ms. Doddi settled, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). Determinations regarding the appropriate amount of disgorgement, prejudgment interest and penalties will be resolved in further proceedings. Mr. Spivak did not settle. See Lit. Rel. No. 23398 (November 2, 2015).

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