In the Matter of Blackstreet Capital Management, LLC

Investment Advisers Act Release No. 4411 (2016)

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In the Matter of Blackstreet Capital Management, LLC

Securities and Exchange Commission
Investment Advisers Act Release No. 4411 (2016)

CS

Facts

Blackstreet Capital Management, LLC (BCM), an investment adviser registered with the Securities and Exchange Commission (SEC), had multiple conflicts of interest with two private-equity funds that it advised and managed. First, BCM charged fees to one fund’s portfolio companies for services provided to them by BCM employees, despite this arrangement’s not being authorized under the fund’s limited-partnership agreement or disclosed in advance to the fund’s limited partners. Second, BCM used the funds’ assets for political and charitable contributions and entertainment expenses that were not authorized or disclosed in advance to the funds’ limited partners. Third, some BCM employees performing services for the funds’ portfolio companies were allowed to invest directly in those companies, subject to each company’s right to repurchase the employee’s shares upon termination of employment. Disregarding this right, BCM purchased the shares of one departing employee without appropriate disclosure or consent. Finally, BCM’s principal, Murry Gunty, acquired interests in one of the funds from two limited partners who defaulted on their capital-call obligations and from six limited partners who sought to sell their interests in the fund. Under the fund’s limited-partnership agreement, the fund’s general partner could require a defaulting limited partner to forfeit all but one dollar of the defaulting limited partner’s interest in the fund; the general partner could then purchase that remaining portion for one dollar. Ignoring this provision, Gunty paid one dollar to purchase each defaulting limited partner’s entire forfeited interest for himself. Although the fund’s limited-partnership agreement provided that anyone who acquired the interest of another limited partner automatically assumed that limited partner’s obligation to meet future capital calls, Gundy caused the fund’s general partner to waive this obligation for him, and this waiver was not disclosed to the fund’s limited partners. In addition, BCM provided securities-brokerage services to the funds but was not registered as a broker with the SEC. The SEC brought an administrative proceeding against BCM for violations of §§ 206(2) and 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and § 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act).

Rule of Law

Issue

Holding and Reasoning ()

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