RIA Compliance Blog
On August 14, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease and Desist Proceedings (“Order”) against Coachman Energy Partners, LLC (“Coachman”), an investment adviser, and its owner, Randall D. Kenworthy (“Kenworthy”). According to the SEC’s Order, Coachman “failed to adequately disclose its methodology for calculating the management fees and management-related expenses it charged” to four oil and gas funds it managed. Coachman and Kenworthy submitted offers of settlement in conjunction with the Order.
The SEC found that from 2011 to 2014, Coachman acted as investment adviser to four funds specializing in oil and gas operations. Each fund was charged an annual management fee which made up 2 to 2.5% of the total capital contributions given to each fund as of the last day of the year. According to the SEC, however, Coachman’s offering materials and Forms ADV did not adequately disclose that the management fees were based upon year-end contributions. Rather, these documents implied that management fees and expenses were based upon “the average amount of capital contributions under management during the course of the year.” Therefore, the SEC alleged that Coachman and Kenworthy overbilled investors in the amount of $1,128,916.
The SEC also alleged that between 2013 and 2014, Coachman billed two of the funds management expenses based upon 1.5% of the total capital contributions given to these funds as of the last day of the year. However, the offering materials for these funds allegedly did not sufficiently inform investors that the funds would be obligated to pay Coachman for management expenses based on year-end capital contributions. Rather, these materials supposedly informed investors that management expenses were calculated using the average number of capital contributions under management for the whole year. The SEC alleges that this resulted in Coachman and Kenworthy overbilled clients in the amount of $449,294.
The SEC also alleged that in June 2014, Coachman had one of the funds sign an asset purchase agreement whereby the fund would buy certain oil and gas leases, along with an account receivable, from a related fund that Kenworthy was a former manager of. The asset purchase agreement did not inform investors of the conflicts of interest inherent in this purchase. It also did not inform investors that the collectability and value of the account receivable were under scrutiny. According to the SEC, Coachman overpaid for the account receivable by about $510,000.
According to the SEC, Coachman and Kenworthy allegedly committed fraud as a result of the above actions, in violation of the Investment Act of 1940 (“Advisers Act”). Coachman and Kenworthy consented to cease and desist from further violations of the Advisers Act. Coachman will also be obligated to pay disgorgement of $2,253,646, which includes pre-judgment interest. This amount is to be offset by $1,362,139 in management fees Coachman earned through February 28, 2017. Coachman must also pay a civil money penalty fee of $50,000. Kenworthy will be obligated to pay a civil money penalty of $50,000.
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