The Managing Principal of a private equity firm agreed to pay $6.2 Million in disgorgement and penalties and a two-year ban from the securities industry to settle charges that he paid undisclosed compensation to obtain state public plan investments.  The SEC alleged that the respondent’s firm, who had dealt directly with the NYS Comptroller, paid unnecessary solicitation compensation to the firm controlled by a fundraiser.  The SEC also alleged that the firm helped distribute a DVD for the Comptroller’s brother.  Although the firm disclosed to the NYS Common Retirement Fund that it paid compensation to a solicitor, the SEC claims that it failed to disclose necessary details.  The SEC alleged violations of Section 17(a)(2) of the 1933 Act, which makes it unlawful to “obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading” in connection with the offer or sale of any security. 

OUR TAKE: The SEC’s pay-to-play rule now specifically prohibits the activity described in this action.  However, it is unclear how Section 17(a)(2) applies here or why the managing principal should be held personally liable.  We have always maintained that these cases should fall under state corruption laws, not the federal securities laws.  Nevertheless, private equity firms that will now register pursuant Dodd-Frank must understand the limits on their capital raising activities. 

http://www.sec.gov/litigation/complaints/2010/comp21748.pdf