RegulationSeptember 18, 2023

Private Equity Firm to Pay $20.5M to Settle SEC Charges of Inadequate Fee Disclosure

Prime Group allegedly did not disclose that $18 million in fund fees went to a firm wholly owned by its CEO.

Reported by Michael Katz

A private equity firm that specializes in alternative real estate investments has settled, for $20.5 million, charges by the Securities and Exchange Commission that it failed to properly disclose $18 million in real estate brokerage fees paid to another company that was owned by its CEO.

“Funds, including those that invest in alternative asset classes, must ensure that their offering materials contain clear, accurate, and adequate disclosures,” Osman Nawaz, chief of the SEC Enforcement Division’s complex financial instruments unit, said in a release. “In particular, information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions.”

According to the SEC’s cease-and desist order, Saratoga Springs, New York-based Prime Group Holdings LLC launched an investment fund in 2017 to purchase self-storage real estate properties. The fund mostly relied on deal teams made up of the company’s employees and independent contractors to find and acquire so-called “off-market” properties.

The SEC order states that, instead of pursuing self-storage properties offered through the auction process used by national brokers, the fund relied on its deal teams to cold-call “mom-and-pop” owners of targeted properties to inquire about their interest in selling their properties and to cultivate relationships with the owners with the hope that they would eventually sell to the fund.

The regulator alleged that the deal teams’ costs and compensation, along with other Prime Group operational expenses, were paid in part from a 3% brokerage fee the fund paid on the acquisitions. According to the order, the fund paid these brokerage fees to a real estate brokerage firm wholly owned by Prime Group’s CEO, Robert Moser, making the brokerage firm an affiliate of Prime Group.

Because the firm did not disclose that an affiliate would be receiving the real estate brokerage fees, the SEC assessed that Prime Group provided misleading statements in the fund’s offering materials, including its limited partnership agreement, private placement memorandum and due diligence questionnaires.

The fund’s “offering and marketing materials contained misleading statements and omissions concerning fees and conflicts of interest,” the SEC order stated. “This information was material to investors and prospective investors as reasonable investors would have wanted to know about fees paid by [the fund] to respondent’s affiliates, including potential conflicts created by such payments.”

Without admitting or denying the SEC’s allegations, Prime Group has agreed to pay a $6.5 million civil penalty and more than $14 million in disgorgement and prejudgment interest to settle the charges.

Prime Group could not immediately be reached for comment.