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VSS restructuring ends with $200,000 SEC sanction

The SEC alleges the firm withheld information on an updated net asset value for stakes in its Fund III before a sale.

Veronis Suhler Stevenson has paid $200,000 to the Securities and Exchange Commission as settlement for allegedly misleading LPs about the value of fund stakes it had offered to buy in an effort to dissolve a $1 billion fund.

The sanction relates to stakes in the New York firm’s Fund III which was raised in 1999 and VSS was looking to dissolve in late 2014. The fund had two remaining portfolio companies at the time VSS offered the deal to LPs – a cash distribution-in-kind payout at a price based on 100 percent of the fund’s December 2014 net asset value. The SEC says the NAV of the fund at the time was $33.9 million, and VSS used this as the basis for the offer to LPs.

However, at the beginning of May 2015, before the deal went through, VSS failed to inform limited partners that they had received information indicating the NAV of the fund had “increased significantly” on the amount previously stated, to the tune of approximately $1.74 million, the SEC says.

The US regulator says the “omission of this information regarding the potential increase in the value of Fund III’s portfolio companies resulted in certain statements in VSS’s May letter being misleading. In addition, after the offer was made, VSS did not provide the remaining Fund III limited partners with the first quarter 2015 financial information, which, according to VSS’s calculations, still showed an increase in Fund III’s NAV.” The SEC said that the offer letter made it appear that the limited partners would receive the full value for their interests.

“VSS is pleased to have reached a resolution with the US Securities and Exchange Commission and to put this inquiry behind us,” the firm said in a statement provided to sister publication pfm. “We have agreed to pay $200,000 to settle a case involving a May 2015 transaction in which we provided LPs an option to sell their LP interests at 100 percent of the 2014 year-end audited NAV in a fund in its 17th year with $6.8 million in remaining NAV after having returned $1.36 billion. VSS is committed to upholding the highest standards in all that we do and we remain dedicated to continually enhancing our practices.”

A person with knowledge of the situation told pfm the later valuation at the centre of the SEC action was incomplete, preliminary and turned out to be incorrect. The person said a third-party appraisal of the fund’s value had previously been approved by the LPs.

VSS “lowballed its purchase offer to LPs” regulatory compliance adviser Cipperman Compliance Services said in a note on the SEC action. The compliance consultant said that it “generally advises against principal transactions with clients/investors/LPs. Purchasing private interests directly from a client is so rife with conflicts that no amount of disclosure may be sufficient.”

“What is interesting about the subject proceeding is that the new financial information which the SEC felt should have been disclosed appeared to be preliminary,” says Ralph Siciliano, a partner at law firm Tannenbaum Helpern Syracuse & Hirschtritt. “One might wonder what would have happened if the preliminary information was disclosed, and some investors decided not to sell their interests based upon it, and it later turned out that the preliminary information was incorrect. Would the investors who did not sell, and would the SEC, then claim that it was not proper to have released the information? These questions demonstrate the significant risks associated with a principal buying investors’ interests.”

In 2015 VSS successfully restructured Fund IV, a $1.3 billion fund raised in 2005, in a deal backed by ICG.

In August this year VSS, which invests in the information, education, healthcare, and tech-enabled business services companies, sold Dutch hosting business IT-Ernity to fellow Dutch hosting provider TransIP after a ten-year hold period.