violations

SEC Finds that Private Equity Fund Adviser Acted as Unregistered Broker

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On June 1, 2016, the Securities and Exchange Commission (“SEC”) announced that a private equity fund advisory firm and its owner agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity, charged fees without registering as a broker-dealer and committed other securities law violations.

An SEC investigation found that Blackstreet Capital Management, LLC (“Blackstreet”) and its principal performed in-house brokerage services rather than using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for a pair of advised private equity funds. Of particular interest is the SEC highlighted that “Blackstreet fully disclosed to its funds and their investors that it would provide brokerage services in exchange for a fee” and that the limited partnership agreements of the advised funds “expressly permitted” the adviser “to charge transaction or brokerage fees.”  However, this did not suffice.

In the press release announcing the Order, Andrew J. Ceresney, Director of the SEC Enforcement Division, emphasized that the rules are clear that “before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets.”

Of note, the Order did not address whether or not Blackstreet offset transaction fees payable by the advised funds against its management fee. This is significant because in April 2013 the Chief Counsel of the SEC’s Division of Trading and Markets gave a speech in which he stated that “to the extent [a private equity fund] advisory fee is wholly reduced or offset by the amount of [a] transaction fee, one might view the fee as another way to pay the advisory fee, which, in my view, in itself would not appear to raise broker-dealer registration concerns.”  Since the Order does not disclose whether or not there was a fee offset in the case presented, it is unclear whether the current SEC staff holds the view expressed by the Chief Counsel in 2013.

 

Bank of America Settles RMBS Actions for $190 Million

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On April 25, 2016, the Federal Home Loan Bank of Seattle (“FHLBS”) agreed to a $190 million settlement with Bank of America in connection with multiple lawsuits filed in 2010 stemming from the sale of hundreds of millions of dollars of RMBS.  FHLBS alleged that Bank of America made misstatements or omissions in connection with the issuance of the RMBS in violation of the Washington State Securities Act.  Additional details of the settlement are not publicly available.

Los Angeles Sues Deutsche Bank For Failing to Maintain Los Angeles Properties

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On May 4, 2011, the Los Angeles City Attorney’s Office filed a civil enforcement action against Deutsche Bank, as trustee of various mortgage loan trusts, for violations of the California Unfair Competition Law and the Los Angeles Municipal Code. The complaint, filed in California state court, alleges that over the past four years Deutsche Bank took title as trustee of more than 2,000 residential properties in the City of Los Angeles through foreclosure and then created public nuisances by failing to properly maintain them. The City also claims that Deutsche Bank illegally forced tenants from their homes, primarily in low-income areas, after taking title through foreclosure. The City seeks restitution, civil penalties, and an injunction from further violations of the law. Complaint (Part 1). Complaint (Part 2).