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  • Writer's pictureJerry Ipsen, CFE, MBA

What Limited Partners Can Do When They Suspect General Partners of Fraud

If you are a limited partner (LP) in a business where a general partner (GP) is possibly engaged in mismanagement, self-dealing, embezzlement or fraud? You as an LP face several challenges.

Since LPs do not participate in day-to-day business operations and a board of directors does not review management decisions, GPs have almost complete control of the partnership. It is at this point criminally inclined GPs have the opportunity to enrich themselves at the business’ expense.”

One example of this kind of abuse is self-dealing.  What we mean by that is — payment of exorbitant fees and benefits are being directed by the GP solely at his or her direction. For example, instead of simply drawing one fee for managing the company, the GP may pretend to provide additional services and be paid separately for them.

A GP may control or own another company that provides goods or services to the limited partnership at inflated rates. In a deal like this, the GP is said to be working both sides.  First, acting for the company providing the services and second, as the company paying for them. This puts him or her in a position to approve contracts that charge the partnership exorbitant or ridiculous fees.

Since LPs have no control over the partnership, you should make sure you know a GP’s reputation and record before investing money. This is accomplished by doing your due diligence first to include running background checks on the GPs. What is their reputation and history? Find out in advance whether the GP provides goods or services to the partnership, either directly or indirectly. If so, how much is the limited partnership paying for them? You want to make sure that transactions are legitimate, free from any conflict of interest and in line with market rates.

Potential losses on your part are limited to your capital contributions. The GP alone is subject to claims, debts in bankruptcy, and lawsuits. However, some GPs intentionally run partnerships into the ground with no intention of paying creditors, leaving LPs little to show for their investment and little or no power to stop the abuse.

If you are already involved in a limited partnership but have suspicions about the honesty of a GP, you’d be advised to engage a forensic accountant to investigate the facts and get to the bottom of your suspicions.  Red flags include a reduction in or fewer distributions or even a lack of financial statements. Ipsen Due Diligence is your resource to investigate. Remember, forensic accounting is only one-half of the equation.  Who you hire must also be a good report writer! 

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