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Conflict of Interests in Private Equity Funds

Until recently, the SEC’s Division of Enforcement focused its enforcement efforts on hedge fund managers who breached their fiduciary duties to clients or engaged in other types of fraudulent conduct. However, the growth of the private equity industry has not gone unnoticed by the SEC, and there have been a wave of enforcement actions against private equity managers in the past few years. One of the areas the SEC has been focusing on is the conflicts of interest between the investors and the manager. Bruce Karpati, the Chief of the SEC’s Asset Management Unit (“AMU”), participated in a Q&A session at the Private Equity International Conference earlier this year, and while he acknowledged that “conflicts of interest are a natural part of the private equity business,” he also warned of the significant risks they pose.1 “Conflicts can lead to misappropriation, deal cherry picking and other forms of misconduct.2

A good example of such conflicts of interest case is the public administrative and cease-and-desist proceedings brought against Matthew Crisp for violating the adviser’s code of ethics, as well as violating the anti-fraud provisions of the federal securities laws, and aiding and abetting the violation of other federal securities laws. SEC’s Division of Enforcement alleged that between 2006 and 2008, Crisp exploited conflicts of interest for his personal gain while working as a partner of Adams Street Partners, LLC, a registered investment adviser to multiple private equity funds.3

According to the Division of Enforcement, Crisp “secretly formed a private investment vehicle,4” AV Partners, with a friend. He then directed an investment opportunity away from Adams Street in favor of AV Partners without disclosing his involvement in AV Partners to Adams Street. He subsequently obtained a payment of $150,000 “during a later buyout of the same private company when the money should have gone to Adams Street to reduce the feeds due from its private equity funds.5” Crisp also allegedly pursued an investment opportunity in a private company in which Adams Street’s funds were invested. He “initially profited by more than $2 million at the expense of Adams Street6” but was forced to return the money prior to the SEC’s action. Crisp ultimately settled with the SEC; he was banned from working as a registered investment advisor for one year and had to pay Adams Street $89,761 and a fine of $50,000.7

At first glance, the Crisp investigation seems to be a routine conflict of interest dispute that could have been resolved among the managers. After all, Crisp did return the profits from the allegedly conflicted transactions. However, the SEC’s Division of Enforcement still deemed it necessary to lift this matter to the level of an enforcement action. This reflects the increased scrutiny that the SEC is placing on private equity fund managers and especially on their management of conflicts of interest. Under the Investment Advisers Act of 1940, investment advisers have a fiduciary duty to provide full and fair disclosure of all material conflicts of interest. As private equity managers continue to register with, and accordingly, fall under the authority of the SEC, the potential for more enforcement actions against advisor personnel who have co-invested in the portfolio companies is significant. Thus, it is critical for private equity firms to establish effective and appropriate compliance policies and procedures.

This action also demonstrates that an effective and appropriate compliance program will go a long way in getting favorable treatment from the SEC. Here, only Crisp was charged with the SEC order; Adams Street Partner was untouched. The SEC noted that Adams Street Partner had internal policies and procedures to address conflicts of interest, including an Integrity Policy, which required prior approval before insiders could co-invest in the Funds’ portfolio companies.8 Furthermore, the SEC recognized the adviser’s policies prohibiting employees from receiving personal payments in connection with the Funds’ investments.9

  1. Bruce Karpati, Private Equity Enforcement Concerns, Private Equity International Conference, New York, N.Y. (Jan. 23, 2013), available at

  2. Id. 

  3. See In re Matthew Crisp, Advisers Act Release No. 3267 (August 29, 2011). 

  4. Id. 

  5. Id. 

  6. Id. 

  7. See In re Matthew Crisp, Advisers Act Release No. 3451 (August 30, 2012). 

  8. See id. 

  9. See id. 

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Bohyung Kim

Vol. 3 Associate Editor

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