If you own a limited partnership interest, or are considering such an investment, you should be aware of a less-recognized form of investor abuse: limited partnership fraud.
Because limited partners do not participate in day-to-day partnership operations and there is no board of directors to review management decisions, the general partner has almost complete control of the partnership. With this combination of superior knowledge and exclusive control, abusive general partners enrich themselves at the expense of the partnership. The most direct example of such abuse occurs when the general partner arranges to have the partnership pay exorbitant fees and benefits. Usually, the general partner’s efforts are more subtle. For example, instead of simply drawing one large fee for his duties as the general partner, he may purport to provide additional services to the limited partnership – and be paid separately for such services.
Even harder to detect, the general partner may control or own another company that provides goods or services to the limited partnership — at high or even unconscionable rates. In such a case, the general partner would stand on both sides of the transaction — that is, he would be acting on behalf of both the company providing the services and the company paying for the services. Thus, he would be in a unique position to approve contracts that charge the partnership exorbitant fees, thereby diverting the funds invested by the limited partners to himself.
Before investing in a limited partnership, find out whether the general partner provides goods or services to the limited partnership, either directly or through another company that he owns or controls. If so, find out how much the limited partnership is paying for those goods or services, and make sure it is in line with market rates. Likewise, if you have already invested in a limited partnership and have not received the anticipated return, you should investigate to ensure that the partnership’s assets are not being depleted through mismanagement or abuse.
Since 1987, partners in our firm have represented clients in some of the largest limited partnership cases in U.S. history.