The SEC revoked the registration of an adviser and its principal accused of mis-classifying and accounting for fund organizational expenses as part of a larger offering fraud.  The respondents also agreed to pay over $10 Million in fines and disgorgement.  Among many other charges, the SEC alleges that the respondents incorrectly classified certain pre-existing expenses as fund organizational expenses in order to maintain a precarious financial position.  The amounts exceeded the amounts described in the PPMs..  Also, the SEC alleges that the respondents amortized org costs, rather than treat them as expenses, as required by GAAP, thereby overstating the funds' NAVs. 

 

OUR TAKE: The SEC has been concerned about how private fund sponsors calculate and account for organizational expenses.  We recommend getting advice from a qualified auditor.