Deccan Value Investors L.P. (\u201cDeccan\u201d) is a Connecticut limited partnership, operating as an investment adviser registered with the U.S. Securities and Exchange Commission (\u201cSEC\u201d) since 2011. Deccan, according to the SEC\u2019s Aug. 3, 2022, Order Instituting Administrative and Cease-and-Desist Proceedings (\u201cOrder\u201d), \u201cpursued a long-term, concentrated, low-turnover, research-oriented, fundamental investment strategy, investing all its dozen or so client accounts in a dozen or so companies.\u201d Most of those companies are \u201clarge, publicly-traded U.S. issuers, with a smaller percentage being foreign and less liquid.\u201d Deccan\u2019s clients were primarily university endowments, many of whose monies were invested in a commingled fund (the \u201cCommingled Fund\u201d), in which Deccan partners, including Vinit Bodas (\u201cBodas\u201d), invested. Deccan also advised one separately managed account (\u201cSMA\u201d) for just one of its university clients. Bodas, a 60-year-old Connecticut resident, was Deccan\u2019s founder, majority owner, and Chief Investment Officer. Indeed, Bodas was the only person authorized to approve transactions during the period that is the subject of the Order.<\/p>\n\n\n\n
Deccan, as of the Spring of 2019, had more than $3 billion in assets under management, which included assets of some of the \u201clargest higher education endowments in the world.\u201d Two of those university endowment funds notified Deccan in 2019, one (\u201cUni One\u201d), whose assets were in the Commingled Fund, on April 26, and the other (\u201cUni Two\u201d), whose assets were in the SMA, in June, that they wished to redeem their respective assets managed by Deccan. Uni One wanted to redeem its entire $146 million investment by 30 June; Uni Two, one of Deccan\u2019s largest and longest-standing clients, wanted to redeem its entire $470 million investment fund by Dec. 27. Deccan created a Liquidating Special Purpose Vehicle (\u201cLSPV\u201d), as permitted under the Deccan Limited Partnership Agreement (though never previously used), to deal with the redemption of some of Uni One\u2019s holdings. The LSPV was notionally intended to facilitate the administration of the redemption and to mitigate any adverse effect on the holdings of other investors in the Commingled Fund. On June 30, 2019, Deccan redeemed 90% of Uni One\u2019s holdings in the Commingled Fund for cash. Deccan then used the 10% remnant (which was equal to about 2% of the Commingled Fund assets) of the Commingled Fund to purchase four less liquid foreign securities and contributed them to the LSPV. Uni Two\u2019s assets were already isolated in the SMA from the assets of other Deccan clients. The aggregate of the requested redemptions totaled some $566 million, which was almost 18.5% of the assets managed by Deccan.<\/p>\n\n\n\n
Deccan did not use a LSPV for any other client that redeemed assets in 2019, nor did it actively seek to liquidate the LSPV securities until July 2019, even declining a May 2019 broker\u2019s bid to buy 16% of those securities. In fact, the Deccan trading and operations personnel followed instructions given by Bodas in April to \u201cslow walk\u201d the liquidation of those securities, so those LSPV securities were not fully sold until April 2020. In November 2019, Deccan offered to buy the LSPV securities at a 25% discount, which Uni One declined. Deccan then sold one of those securities in December for 15% more than Deccan had offered to Uni One in November. One of the LSPV securities was stock in an \u201cunlisted Indian company,\u201d which \u201cBodas loved,\u201d expecting it \u201cto pay off greatly if and when it went public.\u201d Rather than try to sell it, Deccan elected to \u201ccross\u201d that holding by trading it for cash taken from non-redeeming Deccan clients (including Bodas), mostly from a new Deccan client making \u201cits first $100 million\u201d investment with Deccan. The Order notes that \u201c[a]s a result of movements in the market price of the LSPV [s]ecurities, \u2026[Uni] One received less than it would have received had Deccan liquidated its interest in the Commingled Fund or the LSPV [s]ecurities at a reasonable pace and taken advantage of opportunities to sell\u2026that were reasonably available.\u201d<\/p>\n\n\n\n
Deccan redeemed $180 million of Uni Two\u2019s $479 million holdings on June 30, 2019. Uni Two requested the rest by Dec. 31, 2019. Uni Two advised Deccan in its redemption notice that it \u201cdisfavored emerging market private investments,\u201d which it saw as a focus of Deccan\u2019s investment strategy. By Dec. 27, 2019, Uni Two and Deccan had entered an agreement to extend their advisory relationship through January 2020 to allow Deccan more time \u201cto dispose of certain illiquid holdings\u201d \u2026 in the SMA. Some 6% ($17.4 million) of the SMA was the same unlisted Indian company that impeded the liquidation of the LSPV. Deccan received two bids (for 875 Rupees and 880 Rupees) before Dec. 17, 2019, for most of Uni Two\u2019s holdings of the Indian company stock. By Dec. 31, a third-party valuation agent marked the stock price as 840 Rupees. Deccan did not respond to either of the bids; instead Bodas directed Deccan personnel to offer Uni Two 840 Rupees as a \u201cside pocket\u201d investment as part of the same \u201ccrossing\u201d transaction used to liquidate that company\u2019s stock from the LSPV. When Uni Two realized what had happened, it objected. Deccan then \u201cagreed to unwind \u2026 [Uni] Two\u2019s participation in the Indian investment \u2026 and agreed to waive all advisory fees it would have charged\u2026 after Dec. 31, 2019.\u201d<\/p>\n\n\n\n
The SEC charged Deccan and Bodas with breaching their investment adviser fiduciary duties as follows: i) selling illiquid securities in Uni One\u2019s account unreasonably slowly; ii) not reasonably seeking to liquidate the Indian company\u2019s stock for either Uni One or Uni Two; iii) making materially misleading statements and omissions to Uni Two in advising it to sell the Indian company stock to non-redeeming Deccan clients, including Bodas; and iv) failing to disclose to Uni Two, when getting Uni Two to agree to an extension of its advisory relationship, that Deccan needed more time to redeem the illiquid Indian company holding. The Commission also charged Deccan with a) violating recordkeeping requirements under the Investment Advisers Act of 1940, as amended (the \u201c40 Act\u201d), including having reasonable policies and procedures covering investor redemptions (such as when a LSPV would be appropriate and how to balance conflicts of interest between redeeming and non-redeeming clients); and b) with failing to preserve internal communications about Deccan\u2019s business. The Commission also charged Bodas with causing Deccan\u2019s violations and contributing to them.<\/p>\n\n\n\n
As a result, the SEC alleged that Deccan violated the 40 Act: Sections 206(2); 206(4) and Rule 206(4)-8 thereunder; Section 206(4) and Rule 206(4)-7; and Section 204(a) and Rule 204-2(a)(7) thereunder; and that Bodas caused each of those violations. Both Deccan and Bodas consented to undertakings incorporated as part of the Order, specifically: retaining a compliance consultant at Deccan\u2019s expense, where that consultant must within 90 days review Deccan\u2019s books and records policies and procedures, including a review and assessment of training of Deccan personnel, Deccan\u2019s electronic communications preservation requirements and related new technological solutions; and review Deccan\u2019s policies and procedures and related supervision of investor redemptions, including conflicts of interest between redeeming and non-redeeming clients and Deccan\u2019s conflicts in relation to redemptions, the adequacy of disclosures to clients concerning redemptions, and the use of a limited partner review panel with respect to the Commingled Fund. Within 45 days after completion of that review, the consultant must submit a \u201cdetailed written report\u201d to Deccan and to the Commission of the consultant\u2019s findings and recommendations for corrective action, as well as Deccan\u2019s plan for implementing those corrections. In addition, Deccan is required to send a copy of the Order to all current and prior clients within 30 days after the entry of the Order. Deccan must also preserve for at least six years records of compliance with the undertaking set out in the Order.<\/p>\n\n\n\n
The SEC then imposed the following sanctions: both Deccan and Bodas must cease-and-desist from further violations of the cited 40 Act provisions; Deccan is censured; Deccan shall pay a civil penalty of $1,139,501; Bodas must pay a civil penalty of $500,000; and both respondents must comply with the undertakings set out in the Order. <\/p>\n\n\n\n
The university endowment clients of Deccan have certainly had an \u201ceducation,\u201d including learning that Sartre\u2019s existentialist drama can sometimes arise amid investment management, and that as a result there may be \u201cNo Exit\u201d even when one is requested. Deccan may be a Connecticut entity, but for Uni One especially, 2019 must have made it think that (with apologies to \u201cThe Eagles\u201d) it was in \u201cHotel California\u201d \u2013 i.e. \u201cyou can check out any time you want, but you can never leave.\u201d<\/p>\n\n\n\n