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NY AG charges against NYPPEX CEO are myriad and detailed

The New York attorney-general's 229 paragraph lawsuit against NYPPEX chief Laurence Allen lays out what the AG says was a decade-long fraud.

New York Attorney General Letitia James has filed suit against an investment advisor/broker-dealer who she says forged documents, violated the terms of a PPM and LPA, made confusing and misleading amendments to the fund’s LPA that hurt investors, and strong-armed employees on an investment committee to certify investments.

Laurence Allen, CEO of broker-dealer NYPPEX, has been committing fraud since the financial crisis, when he ran into cashflow problems, James’ 51-page complaint claims.

Allen denied all the charges on Thursday, and asserts he is the victim of disgruntled clients using New York’s controversial Martin Act to exact vengeance. In an email to Private Funds CFO, he said James’ “case is misleading and deliberately misrepresents the permitted private investment activities and approved amendments of ACP X.”

The credit crunch

James’ suit claims that NYPPEX ran into liquidity issues in 2008 as the financial crisis intensified, and that Allen began siphoning assets from his ACP X fund — a fund of funds launched in 2004 and dedicated to buying secondaries interests in private equity funds — into his broker-dealer NYPPEX to keep the firm afloat.

Since then, James alleges, Allen has “looted” more than $13 million from ACP to keep NYPPEX afloat, pay affiliate expenses and enrich himself.

Though the fund was supposed to wind down by December 21, 2018, the AG says investors have not received their $17 million in contributed capital back, or their preferred return.

‘Sham’ docs and investment committee

Allen misled investors in order to conceal the fraud, creating “sham” documents “to add legitimacy to the prohibited transactions” from ACP into NYPPEX, James’ lawsuit claims.

The lawsuit also accuses him of designating employees for an investment committee that held no meetings, took no minutes, followed no agenda and held no votes.

Rather, James alleges, Allen created self-serving certifications, forcing the employees to sign off on them “as a condition of their employment,” even going as far as to include this as stated terms in their employment agreements.

“Employees believed that if they did not sign the certifications they would be fired or that their compensation would be withheld,” the lawsuit says.

Investor worries

No affidavits have been released publicly, but the lawsuit includes the texts of supposed investor complaints about Allen’s valuations, the lack of distributions from the fund, and about amendments to the LPA that Allen proposed.

Among other major accusations is that in 2014 one LP threatened to file a mismanagement claim if Allen didn’t buy out the LP’s interest early. The investor was ultimately bought out, but James’ suit says others weren’t given the same opportunity, nor was the redemption and the source of funds used (an ACP bank account) disclosed to other investors in the fund.

But other investors were nervous, according to the lawsuit.

In 2017, one investor wrote to Allen, “I’d like to exercise my right as an investor to understand the valuations. The fund is down to a hand full of key holdings in individual companies. If the fund can explain, we value company ABC at X for these reasons then I can decide if I want an early withdrawal or not.”

That investor, and one other, asked to be bought out, but Allen allegedly responded: “We cannot redeem your investment as per the terms of the operating agreement of ACP X. ACP X is a private equity partnership (and not a hedge fund some of which redeem investments). Otherwise, we would have to provide the same opportunity to all LPs.”

Another investor was worried about Allen’s valuations and the lack of distributions in late 2018, the suit says. She wrote to Allen: “As you know, I am very concerned about the limited distributions coming from ACP X. I do not understand how you can claim the valuations are as high as you say yet only a small percentage of the value of the fund has been distributed to investors (not counting the investors who took a big haircut to get out (through Early Withdrawals) – which I think is outrageous that they felt the need to do that).

“I also do not understand how the majority of the Fund now consists of individual company positions rather than secondary interests in PE funds – which was supposed to be the primary investment that ACP X was making. Are the marks on these positions valid?” the investor wrote, according to the lawsuit.

Auditors get anxious

The lawsuit details emailed interactions between Allen and ACP auditors, who James says repeatedly asked for third-party valuations of NYPPEX and threatened to issue a qualified audit opinion letter. In one email exchange, Allen threatened to fire the auditor over its insistence on support for his valuations, the lawsuit claims.

In 2014, Allen allegedly agreed to an independent valuation of ACP in order to mollify the auditor and get it to release its report. But in May 2016, the auditor began to worry that the independent valuations weren’t coming and reached out to Allen.

Allen allegedly “responded that the requirement was a non-starter, despite his prior agreement, and that he was reconsidering whether to continue adhering to the General Partner’s obligation in the LPA to obtain audited financials at all.”

After James’ office began its investigation and a court order limiting Allen’s access to ACP funds, Allen got a third-party valuation report. But, the lawsuit claims, “the company Allen hired merely incorporated Allen’s flawed projections into a report.”

Carried away with amendments?

The lawsuit also claims that after nine years, investors became concerned with the delay in distributions, and that Allen sought to comfort them with amendments that provided means for early withdrawal. In reality, those amendments were written to trick investors into passing other proposals allowing him to direct additional ACP assets to himself. Allen fraudulently characterized it all as carried interest.

In 2014, one LP became concerned about the amendments, according to the lawsuit, asking for clarification on the clawback amendment and a section of it that omitted any reference to the 8 percent preferred return originally in the offering documents. In the end, James’ lawsuit says, Allen paid himself, other GP partners and other companies he controlled $3.4 million in carried interest.

Take the Seventh

The final major claim of the lawsuit is that Allen sought to punish LPs helping James’ office in its investigation of him.

In December 2018, with the investigation under way, Allen sought to pass a seventh amendment to the LPA, threatening to extend the fund term by a year, distribute all carried interest fees and eliminate the clawback provision if investors didn’t pass it. That would have effectively amounted to a unilateral passing of the amendment’s financial terms.

In the amendment, he allegedly threatened LPs with individual liability if they participated, directly or indirectly, in any formal proceeding. The amendment also proposed to eliminate “nearly all of the General Partner’s disclosure obligations,” including audited financials. It simultaneously proposed to eliminate the entire clawback provision, the AG claims, as well as to allow him to distribute all “earned” but unpaid carried interest, without disclosing the amount.

Allen’s lawyer, Leon Borstein, said he’s still reviewing the case but he doubts whether New York has jurisdiction here. It looks like only four or five LPs actually reside in NY, Borstein says.

“That sounds like a regular civil lawsuit for those three or four people who are New Yorkers, if they do claim they were defrauded,” he told Private Funds CFO. “I’m not sure from my preliminary investigation what the Attorney General is doing, exactly.”