SEC, Hampton managing partner of BFM Fund settle charges

The Securities and Exchange Commission settled charges in early October against a Hampton-based managing partner of The BFM Fund and a limited liability company for allegedly breaching their fiduciary duties and misleading investors.

Himalaya Rao-Potlapally of Hampton is a managing partner of Portland, Oregon-based BFM Fund, a seed-stage private venture capital fund focused on founders who are Black, Indigenous and people of color. It was founded in September 2020 as the Black Founders Matter Fund I.

“Traditional venture capital … [is] a pretty small, closed system,” Rao-Potlapally told Virginia Business in May. “It’s really difficult for different types of founders to be able to access capital when there’s not a broader understanding of different lived experiences that then shape how different people articulate problems, think about solutions, all of that.”

Rao-Potlapally is the sole member and manager of LDP Partners, an unregistered investment adviser organized in May 2021 in Oregon but with its primary place of business in Hampton. Since July 2022, LDP Partners has managed one client, BFM Fund I, according to the SEC.

The SEC’s Oct. 7 order alleged that LDP Partners and Rao-Potlapally willfully violated anti-fraud provisions of the Investment Advisers Act of 1940. It issued cease-and-desist orders and censures to LDP Partners and Rao-Potlapally and ordered Rao-Potlapally to pay a $10,000 civil penalty. The company and Rao-Potlapally agreed to the cease-and-desist orders and sanctions without admitting or denying the SEC’s findings.

As of August, the BFM Fund had sold about $4.6 million worth of securities to 53 investors in multiple states, according to the SEC order.

The BFM Fund is one of seven venture capital fund managers that the Virginia Innovation Partnership Corp. is partnering with to invest $100 million in 100 Virginia-based startups. Gov. Glenn Youngkin announced the partnership, Virginia Invests, in May.

In its order, the SEC alleged LDP Partners and Rao-Potlapally breached their fiduciary duties to the BFM Fund and misled the fund’s investors in three ways:

First, in March 2023, according to the SEC order, LDP Partners and Rao-Potlapally, without notifying all BFM Fund investors, allegedly transferred $600,000 in cash out of the BFM Fund bank account to three different non-BFM bank accounts, including a personal checking account Rao-Potlapally shared with her spouse.

The investment adviser and Rao-Potlapally initiated the transfers after telling the BFM Fund’s advisory committee about concerns that the BFM Fund’s bank account would not be fully protected by the Federal Deposit Insurance Corp., according to the SEC order. In April 2023, a representative from the bank told LDP Partners and Rao-Potlapally that the funds could be returned to the BFM bank account and be fully protected by FDIC insurance, according to the SEC. In August and September 2023, LDP Partners and Rao-Potlapally returned the money, according to the SEC order.

Second, the SEC alleged that in July 2023, LDP Partners and Rao-Potlapally misled BFM Fund investors by providing a financial statement that misrepresented the $600,000 as still in the fund’s control. In November 2023, they distributed a financial statement disclosing the March 2023 transfers.

Third, the SEC alleged, LDP Partners took approximately $55,000 total in improper advance management fees from the BFM Fund in February 2023 and September 2023.

LDP Partners and Rao-Potlapally received approval from BFM Fund advisory committee members to take the fees in advance rather than on a monthly basis, but the fund’s controlling documents did not allow that and the advisory committee wasn’t authorized to allow advance fees, the SEC stated in its order.

Rao-Potlapally could not be reached for comment.