This week the wider world has been digesting the evidence emanating from 11 million leaked documents from Panamanian law firm Mossack Fonseca, looking for indications of either illegal or morally dubious activity.
The private equity world has, meanwhile, been mulling cases of supposed wrongdoing closer to home: there have been three cases of alleged fraud relating in some way to the industry in March alone.
First there was the Aequitas case, in which the US Securities and Exchange Commission began enforcement proceedings against Aequitas Management, an Oregon-based credit firm it says has allegedly defrauded investors and misused clients’ assets in a Ponzi-like scheme.
This was followed by news from the Securities and Exchange Commission (SEC) and the US Department of Justice, which arrested and charged Andrew Caspersen, until recently a secondaries-focused partner at Park Hill and before that Coller Capital, for allegedly defrauding investors of $25 million and attempting to steal another $70 million.
Neither of those cases has been tried yet, but the outcome of another was reported by PEI sister site Private Healthcare Investor: biotech venture capitalist Steven Burrill agreed to settle charges with the SEC after it accused him of siphoning money from a fund managed by his firm.
While a glut of high-profile fraud allegations may be eye-catching, it doesn’t necessarily represent a wider industry trend.
One theory would be that greater regulatory oversight has started to expose a small amount of clandestine activity that has always been there, but has been hitherto unnoticed. After all, the SEC has been stepping up its inspections of private fund managers in recent years. The SEC’s regular inspections are supposed to prevent fraud and protect investors, in addition to monitoring risk and improve compliance, according to its exam brochure.
However, these three cases didn’t come to the SEC’s attention through the inspection process.
The Burrill case, for example, actually took a while to unfold, as Burrill allegedly embezzled millions from one of the firm’s funds between 2007 and 2013, according to two lawsuits that preceded the SEC action. The Caspersen case developed much faster: if the DOJ and SEC’s allegations are correct, the fraud was taking place for less than a year and was brought to the attention of Park Hill and subsequently the SEC and the DOJ by the alleged victim.
In the Aequitas case, the alleged fraud became evident by November, when the firm could no longer meet scheduled redemptions and had to dismiss two-thirds of its employees, according to the SEC statement on the case.
So while these three cases might raise eyebrows in the industry – and, let us not forget, genuine material harm to some investors (if allegations are proved correct) – they aren’t necessarily indicative of a wider trend of increasing nefarious activity.
Historically, the arrival of challenging market conditions has tended to uncover hidden fraudulent activity. It is likely, say legal sources, that the volatility we’ve seen on and off in the past year may simply have made existing frauds – alleged or otherwise – more visible.