Former PEI Funds executive accuses CEO of improperly using fund capital to pay advisers

A former partner at secondaries shop PEI Funds accused the firm’s chief executive of improperly using fund capital to pay advisers he privately hired, according to a complaint filed earlier this year in New York State Supreme Court.

Gunnar Fremuth, a former partner at PEI Funds, said in the complaint that Charles Stetson entered an agreement in January to pay John Barger and his boutique merchant bank, Northerncross Partners, $60,000 a month. Fremuth also claimed Stetson entered an agreement in January to pay the law office of Charles Campbell $20,000 a month, the complaint said.

In both cases, Fremuth said, the advisers were paid out of fund capital without prior authorization from the firm’s other partners, David Parshall and Benjamin Wilson. It’s unclear from the complaint whether limited partners were aware of the arrangement.

“By using investor funds rather than the management fees … Stetson sought further to enrich himself improperly and unjustly by having PEI Funds IV and V pay those expenses directly rather than through the management fees, which Stetson retained for himself,” the complaint said.

The alleged improper fees were just one of a number of charges Fremuth leveled at Stetson and Barger in the complaint, filed in February. Fremuth seeks $10 million in damages as well as unspecified punitive damages.

Fremuth claims that starting last fall Stetson improperly seized control of the firm from the other partners. He says Stetson fired him after the partners refused to pay Stetson’s lavish expenses, including $150,000 for the wedding of Stetson’s daughter.

Fremuth declined to comment. The other partners, Parshall and Wilson, continue to work at PEI Funds and are not part of Fremuth’s complaint.

Stetson, along with fellow defendants Barger and Northerncross Partners, denied the accusations, claiming the lawsuit is simply the “desperate” attempt of a former executive to blame others for his own investment failures. Stetson and Barger asked a judge to dismiss the case in part.

In their response to the lawsuit, the defendants did not seem to address the improper-fee allegation. Their overall defense is that most of Fremuth’s claims arise from a verbal contract, which was never put down on paper, making it void under New York State law. Because the underlying breach-of-contract claim is illegitimate — since no contract existed — Fremuth’s claims fail, the defendants’ response said. They argue Stetson was acting in the best interest of PEI Funds in dismissing Fremuth.

“Plaintiff, and Plaintiff alone, is responsible for mismanaging a number of large investments made by PEI and for engaging in highly inappropriate conduct that threatened to subvert the interests of PEI and its limited partners. In light of these transgressions, Plaintiff’s continued relationship with PEI was untenable,” the defendants said.

In addition, Barger claimed in the response to have no knowledge of any breaches of contract and that he was only providing business services to a client and not interfering with a contract.

Stetson, Barger and their Kirkland & Ellis attorneys, John Del Monaco and Kuan Huang, did not return calls and emails seeking comment.

As both sides await the judge’s decision on the dismissal request, PEI Funds delayed its annual meeting, which was supposed to be held this fall, sources told Buyouts. It’s not clear why the meeting was delayed or whether it will be rescheduled.

The firm had planned to raise a Fund VI but didn’t move forward, according to court documents.

PEI Funds has seen a string of departures, including Fremuth in December. Former Chief Compliance Officer and Controller Ed Muradian left in February, according to his LinkedIn profile, while Kellen DiStefano, a vice president, was listed on the firm’s website until around March.

Muradian was succeeded by Campbell, who according to Fremuth was improperly paid using fund capital. Campbell is mentioned in the lawsuit, but is not named as a defendant in the case.

PEI Funds’ most recent investment pool is Private Equity Investment Fund V LP, which closed in 2010 on $202.7 million. Fund V was generating a negative 4.6 percent internal rate of return and a 0.9x total value to paid-in multiple as of June 30, 2016, performance data from Town of Palm Beach Retirement System showed.

Action Item: Case history is here: http://iapps.courts.state.ny.us/iscroll/SQLData.jsp?IndexNo=650593-2016&Submit2=Search

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