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.