Lorintine Capital LP, a Dallas investment adviser, was fined $10,000 for charging performance-based fees to clients whose net worth wasn’t high enough for them to be charged the fees.
Lorintine Capital was also reprimanded as part of a Disciplinary Order entered by Texas Securities Commissioner Travis J. Iles on May 14. The fine will be paid to the General Fund of the State of Texas.
Lorintine Capital charged a performance-based fee to five clients who invested in LC Diversified Fund I LLC, a private fund. The fee was 1% of the value of a client’s holdings in the fund and 10% on capital gains generated by the fund’s returns.
State and federal securities laws generally allow investment advisers to charge fees based on performance only to “qualified clients.” Federal law mandates that a qualified client must meet at least one of several requirements, such as a net worth of $2.1 million or $1 million invested with the adviser after making the private fund investment.
In contrast, to qualify as an “accredited investor” a person must have a $1 million net worth or an annual income of at least $200,000.
The investment agreement for the LC Diversified Fund did not contain any way for clients to represent that they were qualified investors – only that they were accredited.
Lorintine Capital received $2,845 in performance fees from five non-qualified clients from November 2015 through December 2017.