The SEC has taken action against Prime Group Holdings LLC, a private equity firm specializing in alternative real estate assets. The SEC’s charges revolve around the firm’s failure to provide adequate disclosure concerning substantial real estate brokerage fees paid to an affiliate, owned by Prime Group’s CEO.
The SEC’s Investigation
The SEC, a prominent regulatory body overseeing financial markets, has formally charged Prime Group Holdings LLC. The company, headquartered in Saratoga Springs, New York, has come under scrutiny for its inadequate disclosure practices. The charges stem from Prime Group’s failure to transparently reveal the considerable sums it paid in real estate brokerage fees to an affiliate entity closely linked to its CEO.
The Investment Fund and the Brokerage Fees
Prime Group’s involvement in this case revolves around an investment fund established in 2017. This fund’s primary objective was to acquire self-storage real estate properties. To achieve this goal, the fund relied heavily on deal teams, comprising both Prime Group employees and independent contractors. These teams were tasked with identifying and acquiring off-market properties, a crucial aspect of Prime Group’s business strategy.
The Problematic Brokerage Fees
The heart of the matter lies in the financing of these deal teams and the associated costs. These expenses, along with other operational overheads incurred by Prime Group, were partially funded through a three percent brokerage fee attached to the acquisitions made by the deal teams. Herein lies the issue: these brokerage fees were directed to a real estate brokerage firm entirely owned by Prime Group’s CEO. Consequently, this firm became an affiliate of Prime Group.
The SEC’s investigation revealed that Prime Group fell short in its duty to provide accurate and transparent information in the fund’s offering materials. This lapse extended to critical documents such as the limited partnership agreement, private placement memorandum, and due diligence questionnaires. Prime Group failed to adequately disclose the fact that an affiliate would receive substantial real estate brokerage fees, resulting in misleading statements.
Between 2017 and 2021, the affiliate real estate brokerage firm received an astonishing sum of nearly $18 million in brokerage fees from the fund’s property acquisitions. This significant financial flow went undisclosed, creating an apparent conflict of interest.
Penalties and Resolutions
In response to the SEC’s findings, Prime Group did not admit wrongdoing but opted to cease and desist from violating the relevant provision. As part of the settlement agreement, Prime Group has agreed to pay a substantial penalty of $20.5 million, encompassing civil penalties, disgorgement, and interest. This action serves as a stern reminder of the importance of transparent financial practices within the financial industry.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.