Unregistered “Finder” Crosses Line; PE Fund Slapped by SEC

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A private equity firm’s managing director hired a longtime friend for purposes of acting as a “finder” and be responsible for making initial introductions to potential investors.  He solicited more than $500 million in capital commitments.  The finder was not a licensed broker.

The SEC brought charges against New York-based private equity firm Ranieri Partners after it uncovered that the “finder” consistently communicated with prospective investors and their advisors and provided them with key investment documentation that he received from Ranieri Partners.

In other words, the “finder” crossed the line and became a placement agent.  Ranieri, the fund manager, was ordered to pay a $375,000 penalty.  The finder’s supervisor at Ranieri was subject to a $75,000 fine and a suspension.  The finder–William M. Stephens of Hinsdale, IL–had to pay a disgorgement of pay disgorgement of $2,418,379.20, the money he earned while acting as unlicensed broker-dealer.

When any firm hires someone to send private placement memoranda, subscription documents, and due diligence materials to potential investors—such as the “finder” did in this case—it should hire only someone who is registered as a broker-dealer.  Unregistered “finders” or “marketing agents” can earn and receive commissions upon making introductions only—as long as they are not engaging in further conduct. That is a fine line that is often easy to cross.

The SEC’s order against the managing director, Donald Phillips, and Ranieri Partners found that Phillips aided and abetted the finders’ violations by providing the finder with key fund documents and information while “ignoring red flags indicating that [the finder] had gone well beyond the limited role of a finder and was actively soliciting investments.”

 

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