The Securities and Exchange Commission has charged the two co-owners of a now-defunct New York-based private equity firm with allegedly defrauding the firm’s advisory clients and pocketing millions in fees. One of the co-owners has since consented to a judgment, without admitting or denying the allegations.
The SEC’s complaint claims that Alexander Burns, with the assistance of Andrew Scherr, perpetrated multiple schemes to defraud their advisory clients, which were insurance companies and reinsurance trusts.
Burns was the majority owner of Manhattan-based private equity firm Southport Lane Management LLC, and its affiliated registered investment adviser, Southport Lane Advisors LLC. Scherr was a minority owner in the companies and was charged with aiding and abetting Burns.
As part of their alleged schemes, the SEC claims that Burns and Southport Lane Management acquired the majority interest in multiple insurance companies and their related reinsurance trusts, and then directed those same entities to sign investment management agreements with Southport Lane Advisors.
The SEC alleges that the pair diverted more than $300 million in client cash to the companies that they controlled, in exchange for “essentially worthless or grossly overvalued securities” which they created. The scheme led to at least five insurance companies having insufficient assets to pay policyholder claims, and the companies were eventually placed into receivership, the complaint claims.
In addition to the $300 million in diverted funds, the two firms collected more than $8 million in investment management and advisory fees from the advisory clients. The proceeds were used for payroll, to transfer large sums of money to Burns and Scherr, and to acquire new investment opportunities to grow Southport Lane Management’s business.
The SEC’s complaint seeks permanent injunctions, disgorgement and civil penalties.
Without admitting or denying the allegations, Burns consented to the entry of a judgment permanently enjoining him from violating the charged provisions of the federal securities laws. Payment of disgorgement plus prejudgment interest, and the imposition of civil monetary penalties, will be determined at a later date.