New York Attorney General Letitia James wants to shut down ACP Investment Group in Rye Brook and permanently bar managing partner Laurence G. Allen of Greenwich, Connecticut from selling securities.
James sued Allen, ACP and several affiliates Dec. 4 in New York County Supreme Court, for allegedly defrauding investors and misappropriating more than $13 million.
Allen in effect “merged the companies into a single fraudulent enterprise,” the complaint states. He used his control over the companies to “raid ACP’s accounts, pay himself handsomely, and prop up his other ventures.”
“We believe that not only are the allegations without merit,” Allen said in an email, “but that the suit is a misdirected interference with private contracts among sophisticated investors.”
When Allen became aware of the attorney general investigation a year ago, he submitted a statement to FINRA, a regulatory agency, vigorously denying the allegations.
“I believe that the NYAG does not fully understand the nature of our business, which is atypical in the securities industry,” he stated. “I expect to resolve any outstanding questions raised by the NYAG once discovery is completed.”
ACP states on its website that “client interests always come first” and the goal “is to invest wisely and create value in an ethical manner for our investors.”
ACP is affiliated with NYPPEX private markets, a 15-person broker-dealer and online trading platform, with offices at 800 Westchester Ave., Rye Brook.
In 2014, Allen launched ACP X, a private equity fund that was not allowed to invest in NYPPEX or any company Allen controlled or managed, the complaint states in citing the fund’s private placement memorandum, nor could he actively participate in day-to-day portfolio investment operations.
Seventy-five investors bought $17 million in limited partnership interests from ACP X.
In 15 years, the attorney general claims, none of the ACP X investors got a full return on their $17 million in contributions or on any of the $10 million in accrued returns.
ACP X profited in its first few years, according to the complaint. But during the 2008 financial crisis, NYPPEX began experiencing cash flow shortages and Allen allegedly diverted ACP X funds to NYPPEX, in violation of the private placement memo, to prop it up.
NYPPEX lost money in nine out of ten years, from 2008 to 2017. Revenue for the period totaled $25 million but operating losses totaled $8.9 million.
Allen responded that ACP X has ranked in the top 20% among similar funds since inception.
Allen allegedly transferred $5.7 million from ACP X and then paid himself $5.7 million in salary from NYPPEX.
“Allen exploited the finances of the company for his personal gain,” the complaint states, “paying himself a salary dramatically out of line with NYPPEX’s performance.”
The attorney general claims that Allen inflated valuations of securities to lull limited partners into believing that ACP X’s investment in NYPPEX “was performing well, when in reality, it was not.”
Allen said the valuations have been in accordance with the Financial Accounting Standards Board and generally accepted accounting principles.
“Valuations have been reviewed annually by the independent auditor,” he said, “which has resulted in a clean auditor letter each year.”
The attorney general accused Allen of manipulating his investors into amending the operating agreement and then “unlawfully distributing at least $3.4 million to himself and entities under his control.”
The attorney general, Allen responded, “is attempting to overturn amendments that were drafted by outside legal counsel and approved by the requisite majority of limited partners. If the (attorney general) succeeds, this would create significant risk to the private equity fund industry.”
The attorney general claims that Allen illegally diverted nearly $750,000 from ACP X to pay NYPPEX’s operating expenses.
Allen said operating expenses have been allocated properly and consistently among the affiliated companies.
The attorney general alleges that Allen concealed problems by using metrics “that lacked an objective basis,” according to the complaint.
He projected revenue growth that the enterprise never came close to achieving. In 2018, for instance, he projected $24.3 million in revenue, but actual revenue was $1.1 million.
Allen is accused of fabricating certifications that NYPPEX had been vetted and endorsed by a five-member investment committee. But, “apart from Allen, none of the other individuals identified ever had any role in the investment decisions.”
A year ago, then-attorney general Barbara Underwood filed for a preliminary injunction to bar Allen from engaging in fraudulent practices. When Allen solicited new capital to finance NYPPEX’s 2019 growth plans, he made no mention of the attorney general’s investigation.
“To date, Allen has looted ACP of more than $13 million,” the complaint states. “There is a high likelihood that … defendants will continue to engage in the fraudulent practices the attorney general has identified, irreparably harming investors.”
Allen describes himself as a financial entrepreneur with a 36-year track record of “exemplary regulatory compliance, having never been fined or censured by any securities regulator.”
The complaint accuses Allen and his companies of fraud and breach of contract. The attorney general is demanding that they pay restitution and damages to the investors, that Allen be permanently barred from issuing, promoting or selling securities in New York, and that a receiver be appointed to liquidate the companies “for the benefit of defrauded investors.”
The attorney general’s accusations “are false and defamatory,” Allen said, and ACP and its affiliates look forward to exoneration in court.