Scott Landress, a co-founder of real estate secondaries firm Liquid Realty Partners, has been permanently barred from the securities industry, the US Securities and Exchange Commission announced Monday.
He also must pay a $1.25 million penalty to the SEC within 20 days, after being charged with improperly withdrawing £16.25 million ($20 million; €19 million) in undisclosed fees from two Liquid Realty funds, Liquid Realty Partners III and Liquid Realty Partners III-A.
According to the SEC’s administrative and cease-and-desist order filed on Monday, the funds were formed in 2006 to invest in private equity real estate secondaries transactions, with the investments in real estate funds with underlying investments in properties throughout the UK, a portfolio known as ‘Project Ursula’. The investment advisor to the funds, Liquid Realty Advisors (LRA) III, earned management fees based on the net asset value of the underlying investments, the SEC said.
However, property values fell in the wake of the global financial crisis, and by the second quarter of 2009, the unrealised net asset value of the funds had plummeted 94 percent, according to the SEC document. As a result of this decline and the divestment of certain assets in the funds, the firm’s management fees shrank while its costs increased as the impact of the crisis caused LRA III to perform additional services, leading the advisor to operate at a loss.
Between 2009 and 2011, Landress sought additional capital from the funds’ limited partners, but the investors declined to cover the shortfalls. On 7 January 2014, he had £16.3 million transferred from the funds to SLRA, the successor entity to LRA III, and on 3 February, informed the limited partners about the withdrawn capital, which he stated was for fees relating to services performed for the two funds from 2006 to 2013, according to the SEC’s statement.
The following month, Landress had the money transferred to a personal account, the statement notes.
Shortly after, Landress entered into negotiations with the limited partners and agreed to freeze the withdrawn fees in his account. That August, the funds’ general partner and SLRA then filed suit against certain investors in the Southern District of New York, seeking a declaratory judgment and other relief and asserting that SLRA was entitled to the service fees.
After the SEC’s investigation began, the parties reached a final settlement in February 2016, under which SLRA returned $24.4 million to the limited partners.
In its order, the SEC said that Landress and SLRA violated Sections 206(1) and 206(20) of the Investment Advisers Act of 1940, which prohibits an investment advisor from engaging in practices to defraud or deceive any client or prospective client; and also violated Section 206(4) of the Advisers Act and Rule 206(4)-8, which prohibits an advisor from making an untrue statement or omitting to state a material fact to any investor or prospective investor in a commingled fund or otherwise engaging in fraudulent, deceptive or manipulative behavior with respect to any investor or prospective investor in the fund.
San Francisco-based Liquid Realty was founded in 2001 by Landress and Mark Berman. In 2007, the firm raised $570 million for Liquid Realty Partners IV, which, at the time, was the largest real estate secondaries fund ever raised.
Its has not raised subsequent fund – in 2012 the firm halted fundraising for Liquid Realty Partners (LRP) V, for which it was seeking $800 million, sister publication PERE reported at the time.
Landress could not be reached for comment.