SEC Charges Private Equity Firm Prime Group for Inadequate Disclosure of Fees Paid to Affiliate
The Securities and Exchange Commission today charged Prime Group Holdings LLC, a private equity firm focused on alternative real estate asset classes, for failing to adequately disclose millions of dollars of real estate brokerage fees that were paid to a real estate brokerage firm that was owned by its CEO. Prime Group agreed to pay a $6.5 million civil penalty and more than $14 million in disgorgement and prejudgment interest to settle the charges.
According to the SEC’s order, Prime Group, based in Saratoga Springs, New York, launched an investment fund in 2017 to purchase self-storage real estate properties. The order found that the fund mostly relied on deal teams comprised of Prime Group’s employees and independent contractors to find and acquire “off-market” properties. The deal teams’ costs and compensation, as well as other expenses of Prime Group’s operations, were paid, in part, from a three percent brokerage fee the fund paid on the deal teams’ acquisitions. The order found that the fund paid these brokerage fees to a real estate brokerage firm that was wholly owned by Prime Group’s CEO, making the brokerage firm an affiliate of Prime Group. As a result, according to the order, Prime Group made misleading statements in the fund’s offering materials, including its limited partnership agreement, private placement memorandum, and due diligence questionnaires, concerning fees and conflicts of interest, because Prime Group failed to adequately disclose that an affiliate would be receiving these real estate brokerage fees. Between 2017 and 2021, the affiliated real estate brokerage firm received nearly $18 million in brokerage fees at the closing of the fund’s property acquisitions.
“Funds, including those that invest in alternative asset classes, must ensure that their offering materials contain clear, accurate, and adequate disclosures,” said Osman Nawaz, Chief of the SEC’s Enforcement Division’s Complex Financial Instruments Unit. “In particular, information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions.”
The SEC’s order finds that Prime Group violated Section 17(a)(2) of the Securities Act of 1933. Without admitting or denying the SEC’s findings, Prime Group agreed to cease and desist from violating the charged provision and to pay the $20.5 million in penalties, disgorgement, and interest.
The SEC’s investigation was conducted by William Finkel, Zachary Sturges, and Daniel Nigro of the Complex Financial Instruments Unit. It was supervised by Joshua Brodsky and Mr. Nawaz.