SEC Charges Private Equity Firm Prime Group for Inadequate Disclosure of Fees Paid to Affiliate

The Securities and Exchange Commission (SEC) has taken action against Prime Group Holdings LLC, a private equity firm that specializes in alternative real estate asset classes. The SEC has charged Prime Group for its failure to provide adequate disclosure regarding substantial real estate brokerage fees paid to a brokerage firm owned by its CEO. As part of the settlement, Prime Group has agreed to pay a civil penalty of $6.5 million, along with more than $14 million in disgorgement and prejudgment interest to resolve these charges.

According to the SEC’s order, Prime Group, headquartered in Saratoga Springs, New York, initiated an investment fund in 2017 with the purpose of acquiring self-storage real estate properties. The order reveals that the fund primarily relied on deal teams comprised of Prime Group’s employees and independent contractors to identify and acquire “off-market” properties. The costs, compensation, and other expenses related to Prime Group’s operations, as well as the deal teams’ acquisitions, were partially funded through a three percent brokerage fee paid by the fund for the acquisitions made by the deal teams. The order further highlights that these brokerage fees were paid to a real estate brokerage firm entirely owned by Prime Group’s CEO, thereby designating the brokerage firm as an affiliate of Prime Group. Consequently, as per the order, Prime Group made misleading statements in the offering materials of the fund, including its limited partnership agreement, private placement memorandum, and due diligence questionnaires. This misleading information pertained to fees and conflicts of interest because Prime Group did not adequately disclose that an affiliate would be the recipient of these real estate brokerage fees. Over the period from 2017 to 2021, the affiliated real estate brokerage firm received nearly $18 million in brokerage fees upon the completion of the fund’s property acquisitions.

Osman Nawaz, Chief of the SEC’s Enforcement Division’s Complex Financial Instruments Unit, emphasized the importance of clear, accurate, and comprehensive disclosures in offering materials for funds, including those investing in alternative asset classes. He stated, “Information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions.”

The SEC’s order determines that Prime Group violated Section 17(a)(2) of the Securities Act of 1933. Without admitting or denying the SEC’s findings, Prime Group has agreed to cease and desist from violating the aforementioned provision and to fulfill the $20.5 million penalty, disgorgement, and interest obligations as stipulated.