SEC Charges Private Equity Firm for Inadequate Disclosure of Fees

SEC Charges Private Equity Firm Prime Group for Inadequate Disclosure of Fees Paid to Affiliate

The Securities and Exchange Commission today charged Prime Group Holdings LLC, a private equity firm focused on alternative real estate asset classes, for failing to adequately disclose millions of dollars of real estate brokerage fees that were paid to a real estate brokerage firm that was owned by its CEO. Prime Group agreed to pay a $6.5 million civil penalty and more than $14 million in disgorgement and prejudgment interest to settle the charges.

According to the SEC’s order, Prime Group, based in Saratoga Springs, New York, launched an investment fund in 2017 to purchase self-storage real estate properties. The order found that the fund mostly relied on deal teams comprised of Prime Group’s employees and independent contractors to find and acquire “off-market” properties. The deal teams’ costs and compensation, as well as other expenses of Prime Group’s operations, were paid, in part, from a three percent brokerage fee the fund paid on the deal teams’ acquisitions. The order found that the fund paid these brokerage fees to a real estate brokerage firm that was wholly owned by Prime Group’s CEO, making the brokerage firm an affiliate of Prime Group. As a result, according to the order, Prime Group made misleading statements in the fund’s offering materials, including its limited partnership agreement, private placement memorandum, and due diligence questionnaires, concerning fees and conflicts of interest, because Prime Group failed to adequately disclose that an affiliate would be receiving these real estate brokerage fees. Between 2017 and 2021, the affiliated real estate brokerage firm received nearly $18 million in brokerage fees at the closing of the fund’s property acquisitions.

Hester Peirce, Republican thorn in the SEC’s side

Peirce’s firm views have brought her both fans and vicious detractors, particularly on the social media site X, formerly Twitter. When she voted against forcing more disclosure on private funds in January, the hashtag #FireHesterPeirce started trending and opponents leapt on board with attacks, including on her physical appearance.

Those who support Gensler’s regulatory agenda contend Peirce’s constant dissent damages the SEC by calling into question its purpose as a regulatory agency and the good faith of those that disagree with her. Such views undermine an agency that is required by design to have two members of one party and three of the other to foster compromise, they said.

***

While three years of losses might grate, Peirce continues to fight. “I‘d rather that everyone agreed with me and we weren’t writing rules that I didn’t think we should be writing. But this is the world we’re in,” she said.

Grayscale urges U.S. SEC to approve spot bitcoin ETF following court victory

Grayscale Investments on Tuesday urged the U.S. Securities and Exchange Commission (SEC) to quickly approve its proposed exchange-traded fund that would track bitcoin, following the crypto asset manager’s court victory against the agency.

***

“We hope you will agree that the best use of resources now is for the (SEC) to issue an order approving” the product, Grayscale’s law firm DavisPolk wrote in a letter which was filed with the SEC on Tuesday.

***

“If any other reason could be offered in attempting to differentiate” the two types of products “we are confident that it would have surfaced by now,” DavisPolk wrote.

Six bitcoin billionaires in the world, new crypto super-rich report says

The firm’s report on Tuesday says says 88,200 people have crypto assets worth at least $1 million — less than 1% of overall crypto users. Some 40,500 of them hold their investments in bitcoin, just under 46% of the total.

Far fewer people are so-called centi-millionaires who have crypto holdings valued at over $100 million. Just 182 such investors exist, with a reported 78 of them focused on bitcoin.

And 22 people have crypto holdings worth at least $1 billion. Six of them hold their investments in bitcoin — a far smaller proportion than among the crypto millionaires and centi-millionaires.

Robotic Aircraft Company Hit with COVID-19 and Supply Chain-Related Securities Suit

In my recent roundup of the top stories in the world of directors’ and officers’ liability and insurance, I noted that a host of macroeconomic factors – such as supply chain disruptions and labor supply constraints — continue to weigh on companies and, in some instances, translate into securities class action litigation. I have also noted in numerous prior posts how COVID-19 has itself resulted in securities lawsuit filings. In the latest example of a securities suit filing resulting from these various phenomena, last week a shareholder plaintiff filed a securities lawsuit against the robotic aircraft systems development and service company AeroVironment after the company delivered disappointing results due to supply chain woes resulting from COVID-19. The complaint is both representative of these types of cases and illustrative of how these kinds of concerns, even after a significant time lag, can result in a current securities lawsuit filing. A copy of the plaintiff’s August 30, 2023, complaint can be found here.

The SEC’s Next Key Courtroom Battles With the Crypto Industry

Despite the SEC seemingly having a full plate, lawyers consulted doubted that the agency would slow down enforcement in new areas of the crypto market.

Pushing ahead in DeFi is one possibility. At the extreme end of this would be the commission doubling down on Gensler’s suggestion that Ether, the second-largest crypto by market cap, has become a security since it switched over to proof-of-stake.

***

“The claim that would launch a thousand warships…would be that Ethereum is a security,” says Hughes, whose firm, ConsenSys, was founded by Ethereum co-founder Joseph Lubin and is dedicated to building on the same blockchain. “I’m imagining the scene from Avengers: Endgame where everyone came out to fight this battle, and you can imagine who Thanos is.”

Bread, Water and Peanut Butter: Sam Bankman-Fried’s Life in Jail

Sam Bankman-Fried, the 31-year-old cryptocurrency mogul, has spent nearly a month at the Metropolitan Detention Center in Brooklyn since a federal judge revoked his bail in August. As Mr. Bankman-Fried prepares for a fraud trial next month over the collapse of his crypto exchange, FTX, his lawyers have offered a picture of the conditions he has faced at the jail — a far cry from the Bahamas penthouse he once shared with other billionaire executives.

In a series of court filings, Mr. Bankman-Fried’s lawyers have raised issues such as the disruption to his vegan diet in jail, as well as his dwindling supplies of prescribed medication like Adderall, which treats A.D.H.D. They have also said he has not been getting enough access to the internet to prepare for his trial and should be released.