In In the Matter of SLRA Inc., Investment Advisors Act Release No. 4641 (admin proc Feb. 7, 2017), the Securities and Exchange Commission (the “SEC”) filed an order instituting administrative and cease-and-desist proceedings against SLRA Inc. (“SLRA”), as successor entity to Liquid Realty Advisors III, LLC (“LRA III”) and Scott Landress (“Landress”) (collectively, “Respondents”) for alleged violations of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Respondents submitted Offers of Settlements (the “Offers”), which neither admitted nor denied the allegations, which the SEC accepted.

According to the SEC’s allegations, between 2009 and 2011, Landress sought additional compensation from the limited partners of two funds (the “Limited Partners”), Liquid Realty Partners III, L.P. and Liquid Realty Partners III-A, L.P. (collectively, the “Funds”) and from the advisers to the Funds, SLRA and its predecessor LRA III.  The Limited Partners refused the requests. On January 7, 2014, Landress, as the controlling member of SLRA and the general partner, directed the transfer of £16.25 million from the Funds’ accounts to SLRA. On February 3, 2014, Landress informed the Limited Partners the withdrawals covered fees owed to an affiliate for services provided to the Funds from 2006 through 2013 (the “Service Fees”). In March 2014, Landress transferred the money to a personal account.

Landress claimed the operating documents of the Funds and an oral agreement made in 2006 allowed the related party transactions. The SEC determined Landress did not disclose the oral agreement, the Service Fees, or the related party transactions and conflicts of interest until 2014. Additionally, the SEC alleged Landress misrepresented to the Advisory Committee created by each limited partnership agreement that the Funds’ auditors “advised [the General Partner] in conversations that the Service Fee need not have been disclosed per GAAP standards.” Lastly, the SEC determined Respondents breached their fiduciary duty by withdrawing the funds and failing to disclose the existence of the Service Fees, which ultimately prevented the Limited Partners from making informed investment decisions.

Sections 206(1), 206(2), 206(4) and Rule 206(4)-8 of the Advisers Act “prohibit making an untrue statement of a material fact or omitting to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor . . . in the pooled investment vehicle and engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”

In light of the allegations, the SEC determined to impose sanctions.  Accordingly, the SEC ordered Respondents to cease-and-desist from “committing or causing any violations and any future violations of Sections 206(1), 206(2), 206(4) of the Advisors Act and Rule 206(4)-8 thereunder.” SLRA received censure. Landress was barred from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. The Commission also assessed a penalty against Landress of $1,250,000. 

The primary materials for this case may be found on the DU Corporate Governance website.