THE PEOPLE OF PRIVATE CAPITAL : Thomas J Powell. Managing the risks of regulatory scrutiny

Foreign.

Hi, and welcome to another episode of the People of Private Capital. My name is Ferdy Roberts. I'm the CEO and founder of Asset Class. We provide solutions to the private capital space to venture capital companies, private equity companies looking to streamline their operations and delight their LPs. Today on this episode, I'll be talking with Tom Powell. Tom is an entrepreneur and experienced operator across most of the private capital markets, including multi billion dollar lending in commercial real estate, fundraising in the energy markets, in oil and gas, and investing at a fund level and at a family office level in the tech sector, with a particular focus on fintech. Tom, in addition to running his family office, is a senior advisor at the Brehon Group. And the Brehon Group works with firms and general partners in venture capital and private equity, with a particular focus on asset protection strategies. Now, all of this experience gives him unique insights into the role of the general partner and the risks and rewards that come with it. And so in today's episode, we'll learn a little of Tom's background, his thoughts on the current private market landscape, and we shine a spotlight on the challenges that come with overzealous regulatory oversight. In particular focused on the sec, and how his personal experience has led to his latest venture providing asset protection and risk management expertise to funds and their general partners around the world. I've had the opportunity of knowing Tom for a decade plus. We share some of that background in this episode. I hope you enjoy it. And with that, let's dive into the latest episode of the People of Private Capital.

So, clearly a lot going on there. Tom, delighted to have you finally on the podcast. We've been trying to set this up for a while. You never want to sit still. Thanks very much for taking the time out here to join us today.

Absolutely. It's my pleasure and I love working with your group. We obviously have a long background together and excited for the work that you and your team are doing, and it's a very important work in the marketplace.

Much appreciated, Much appreciated. Well, we're going to get into the detail of this. Much of what we're practicing I've learned from you in various capacities, but we'll dive into that. I want to start, Tom, as we do with all of our guests here on the People of Private Capital podcast, with a little bit of background on our guest. And so if we can kind of go right back to, let's say, the early part of your career, latter part of the 80s in Silicon Valley, coming into Wells Fargo, maybe give us the brief potted history from then until now. So people have an appreciation for your background.

Yeah, you know what I laugh about that is that as we get older it's no longer brief, but I'll try and keep it as brief as possible. You know, I realized that the first time I started my first company and had to raise capital. I was 12 years old. And what I needed to raise capital for was I actually needed to borrow somebody else's lawnmower so I could go mow lawns and make money. And that did lead as I was going through school and working, as you mentioned, at Wells Fargo bank in the 80s during deregulation, saw a number of opportunities and in 92 we raised our first private fund in Silicon Valley. And specifically it was because it was the first recession as an adult that I had gone through.

And so that gave us an opportunity to see even in a recession there was an opportunity. There were people that had money, there were people that needed money and the banks stopped lending. And that became somewhat the basis of our career. Whether it was in lending, which has been a large part of our portfolio, it's been a little more than $3 billion that we've put out in the marketplace through private placements. AUM as a, as a, you know, SEC regulated RAA at one point was a little more than 2.2 billion AUM under management.

Right.

Over 200 funds as you know. So that, that, you know, has catapulted us, you know, through the years where we've seen Dodd Frank come in. What does a regulation actually require? Do you have broker dealers? All the various parts and principally we' either the general partner position, as you've said, and also in the limited partner, but managing mostly the limited partner funds that have come through from the retail or private investors, high net worth individuals. Again, these terms, many of them now are standard, but there was no such thing as what was called a family office at the time. That wasn't even a concept. There weren't VCs, there wasn't a hedge fund. You know, it was. What did you do? Well, we kind of marry people up. So that's the quick background. We've done an awful lot of venture capital type early stage financing. Our sweet spot's usually between 750 to 5 million on the venture side and on the commercial real estate side it's obviously been much larger. Having been involved in projects that have been upwards of 700 acre infill redevelopment type stuff that you've seen, you know, have, have participated and been sold to big brand names. Down to just little middle income workforce, housing projects in Truckee, California which is what one of my focuses are right now for my own personal. It's where my family's been for over 100 years and like participate in that also in fintech as you know and various other spaces and not to mention the wonderful foyer into oil and gas which was a, you know, almost a half a billion dollar learning lesson for us.

So. Yeah, for sure.

For sure. Yeah. Well, you know I think that the, the thing that's really interesting about your, your background Tom, is it is multi asset class. It is multi decade, I guess 35 plus years, you know, in the industry now and through multiple recessions. In fact, if I remember correctly, you wrote a book about.

The impact of the recession just standing in the rain. Is that right?

Standing in the rain. And you know that was a, it was not a. I was at the time part time teaching at Harvard and.

You'Ve got all these academics around you writing these massive books and detailed case studies and such and mine was simply a treatise on. People are asking me, very intelligent people, very educated people, but they weren't from the finance sector and like how did this happen? So it's a very, you know, you know, educated professional person, but it's not their space guide to how did the meltdown happen. And the kind of funny backstory of that was when the, the Big Short movie came out, one of my family members looked at me and said that's your book. And I'm like yeah, they didn't base it on my book but yes, it is my book.

Yeah, but similar story. Yeah. Well, I mean what's been interesting and super educational for me, I mentioned kind of at the headset that we've had the opportunity of working together.

For certainly four or five years. Known each other over a decade. Just by way of background for our listeners. First engaged with you when I was running my own software company in the Valley and you were amongst other things providing very helpful guidance to lots of startups around raising private capital. It was my first foray into raising significant private capital and grade three days that we spent at I think it was the UC Davis campus from memory was it. Remind me that was Draper Draper University.

In San Draper University together for University Cal. Bill Fisher who was one of my mentors and you got to know Bill a bit over the years. Bill hired me at Wells Fargo Bank. Bill went on to raise millions of dollars just after I left Wells Fargo Bank. We've been business associates now for over 35 years as well and in his latest startup, I just realized, you know, we have invested a significant amount of capital to that. But we got approached and asked who but the dean of the B school was our former boss at Wells Farco bank and said, hey, would you put something together to do to teach others how to raise early stage capital? And that's how that whole thing came about. And you know, it was a whirlwind tour. The World bank ended up picking up and introducing us to various countries that want to have a echo, you know, an ecosystem of, of Silicon Valley which is not easy to duplicate. But that's, that's how that all came about. And yes, it's another passing along the abilities of how to raise, you know, early stage capital which stops most entrepreneurs in their tracks.

Yeah, yeah, well, it was certainly eye opening for me. In fact, not long after that education, I, I exited that business on the, very much influenced by, by that event and spent the next three or four years in the earn house on that before eventually getting an opportunity to work with you, which again was great.

If.

I recall correctly, was when the light went on in your head and we were talking about how much an early stage entrepreneur should give away for the capital that comes in for their idea and their hard work that has gotten this off and in many cases even their early stage credit card debt or whatever else to launch the idea. And as you were doing the math, you're like, my best time to sell is now.

Exactly.

Is that a fair.

Exactly. It was, it was an epiphany for sure. So that, that was, that was time and money very well spent in hindsight. So yeah, just very much appreciated. But you know, coming out of that and, and getting exposed to the pride, that was really my first real exposure to the private capital space. And then having the opportunity to work with you over a number of years after that in various asset classes gave me a much deeper understanding which in fact has led to the formation of asset class. So it's been formative in many, many ways. Lots to thank you for that. But you know, as I look back at your background, just that that depth of experience in private capital, it's very personal experience. Before we kind of dive into the primary focus of, of this episode, which is, is really looking at kind of regulatory oversight and maybe even the regulatory overstep that's, that's happening in the, in the markets right now, in the private capital markets. Do you have any observations on the markets as they stand right now? I'm particularly interested in commercial real estate because it's just, it seems to be this ticking time bomb of, of challenge. But I also know just from having worked with you previously that every market, good or bad, presents its own opportunities. And just interested in your thoughts, perhaps in summary, on what's happening right now.

You know, I was recently in the Bay Area and was amazed at both how little traffic there was and how much traffic there was. Right. So, and I was right in the heart of Silicon Valley for part of that. And traveling around, there's always opportunity. Commercial real estate in of itself is such a large nomenclature because it includes everything from multifamily housing to the little mom and pop strip center that is, you know, that everybody goes to and, and much of it in between. So it can be multi million feet. It can be just something that's maybe 5,000 square feet type scenario. It can be retail, it can be office. So and then, then you get into primary, secondary and tertiary markets and best of execution and all the various pieces. So you're talking about a multitrillion dollar just segment of overall investment capital. Right. And the largest part of what is really the wealth in much of the United States. So when we say that it's hitting headwinds, office space is not only hitting headwinds, it's taken on huge amounts of flood water. But that also means so what's the opportunity there? And we're seeing people do conversions of office space and office buildings, class A office space even, and turning that into housing, which is something that we need in many of these places. And you're seeing that city planners are becoming more aware, mostly because of screaming and yelling of actual entrepreneurs and the general public, that just having a pretty office building, but there's no one living nearby, it doesn't do any good. So you know, hopefully we'll see this as a reckoning where we come back around and you get a more walkable city scenario. There's going to be pain in there for us and for our family office and what we've done over the years.

One, we think that this correction in the market has been too long incoming. The Fed kept very, very, very low interest rates, which are unnatural and not healthy for the community and for the, for the markets in general. It's great for the business people that are in at that time when they're borrowing for almost nothing. But there is going to be the pain of recapturing that. So we think that there's great opportunity to be looking at distressed debt and have been buying a number of those assets at this point, very close to the bankruptcy trustees to say, hey, we'll be a potential buyer. They're messy, they need cleanup. But that's probably my 50,000 foot view. Without looking at a specific deal, the place that I'd be looking at is distressed debt in certain segments and then seeing how you can repurpose what the properties are. But we're still making people and we're still letting people in to the country and we're still having opportunities go on. So, you know, it's, it's a, it's a, there's going to be people that get hurt, but there's also lots of opportunity.

Yeah, yeah, yeah. Well, it's, it's interesting. I mean, we'll get, we'll get onto the detail of this specifically perhaps in a couple of minutes. But that, that's, that shift in the market, those challenges that are being presented to investors in that market, to general partners who are running funds that had previously invested in these properties. And you know, the capital stack is now getting very precarious given what you said as you say that the change in interest rates, you know, even the lack of movement in interest rates looks like it'll be latter part of this year before we'll see any of those promised quarter point rate cuts. But that, that is causing challenges for, for general partners in these funds. And one of the, I guess the key areas I'd like to focus on in this episode is, you know, as a general partner in a fund, most people don't really understand the kind of exposure and the potential risks that, that you take on. Certainly historically, general partners have been celebrated for, you know, large, you know, windfalls and being insightful enough to take advantage of market movement. So you're a genius if everything goes well and you're vilified if the market turns against you. And so there's a balance to be struck in, in the role of a general partner in terms of protections and things of that nature. But perhaps we can kind of zoom out and.

We'Ll close the aperture a little bit in terms of your experiences. But like talking more generally about a general partner, what kind of risk does a general partner establishing a fund today take on, typically without, you know, getting too much into the weeds, but just at a very high level.

Well, first of all, it's great to be a general partner and there are total upsides. It's far different than being a W2 employee or, you know, a person of corporate status at a large corporation. With that risk comes reward. And as I'd say about one of the Things that I love. My, my father in law is 82, as you know, and he's still a great skier and we go all over the world and he's, he holds his PhD in engineering and, and sometimes we'll be looking at something. He goes, you know, there's, there's, and this comes from pilots, but there's old guys and there's bold guys, but there's no old bold guys and.

Skiers or pilots or whatever else you want to fill into that. And it can be women as well as men to not be sexist now, but yeah scenario. So the thing about being a general partner is you have to be bold. You have to take those opportunities and the market rewards you when it wins and the market punishes you beyond recognition when it fails. And the problem with the risk for the. Is.

The risks that are known you can take strategic positions against. It's the risks that are unknown or unaware. And one of the big risks out there today, and we actually started putting into our documents probably while you were, you know, we're still working together, was regulatory risk. That you just have a regulatory inquiry.

Yeah, just.

And all of a sudden that takes the general partner's eye off the ball. And that inquiry happened either because somebody noticed your name in the paper or whatever, or an investor wasn't getting the returns or wasn't getting a return phone call. It could be all sorts of reasons that it ends up happening. And understanding that regulatory risk and the time that it's going to take, not just for you, this is not something you can delegate to your attorneys or your inside counsel because at the end of the day, no matter how well you've generally set up those entities, they're coming after the control person. And that control person is generally the one who is set there to have the biggest game. And that's part of the risk. And the limited partners theoretically are only at risk to their amount of capital. The general partner is at risk for anything. And that's why we use entities such as LLCs, which prevent some of that risk from passing through and management companies and great documents and great disclosures and all of those various pieces. But at the end of the day, a great disclosure does not prevent you from being litigated against in a civil court where it's a preponderance of evidence and generally a judge and if you go to a jury trial that is not of the general partner's peers, it's of the limited partners or whoever else's peers.

Yeah.

So that, that's kind of My overall and it's not to be too cynical, but that's a really over a 50,000 foot view of the risk that takes out what you know, just to mention here, we have not begun to see bank failures still. Silicon Valley bank had nothing to do specifically with the real estate market. It really had to do with the bond market that they were encouraged to invest in mortgage backed securities again. Right. And the market goes up and a lot of that other debt that is mispriced bond values are sitting on other banks portfolios, let alone the fact that there's actual real estate underlying debt that is in bank portfolios. And the last part of that is as a general partner you've generally taken on the the responsibility to get new debt for projects to go forward and the banks generally are not lending a whole bunch. So that's a whole nother level of risk.

So you got this kind of perfect storm of that.

Occurrence of trying to de risk their balance sheets and at the same time this market move. Mix in a bit of COVID and you got this kind of perfect storm. Well, you know what, what piqued my interest back in January, Tom, you published a piece on the DIY which many of our listeners will will be familiar with. And the title of the piece was the SEC on Trial. You know, reigning in unchecked power. And it's a really interesting piece. Encourage people to to go and check it out. We'll put a link in the show notes. But the just kind of summarize your thinking around that. I mean I guess the, the high level thought behind writing that piece.

That's a lot to unpack. More so than even just probably my career history. But.

A couple years ago I started a blog post called Publius Connect and I did it and it's been published a lot in DIYer as an anonymous and Publius. But I am publicly here saying, you know, yep, I share with many other great people including Alexander Hamilton the name Publius as a right, you know, written name out there. And it's to bring make a point that when you're dealing with the government.

Most people do not understand that our right to be able to say our thoughts publicly is protected in the Constitution. It's not specifically theorize that. It's because I want to express my opinions to you. It's that if the government is doing something that I believe is improper, I have a right to speak out against the government. And that's really the crux of the first Amendment rights and what many of our regulators that are in the civil.

Area of enforcement do is they infringe on first Amendment rights. And that's what that article was really about. And it has to do with the fact that, that it is standard practice. When someone signs a settlement with the sec, with the epa, with the irs, but specifically with the sec, there's a gag order that says you can never talk about this and you can't say how the process went. Well, what that does is that eliminates a whole bunch of criticism of the government. And good, bad or indifferent, when somebody wants to read about the Jarcy case that's in front of the Supreme Court now.

It'S not about the case, it's about the rights of the rest of the people and to be able to criticize our government. And so the whole process, and that's five shows in of itself of how civil litigation. And to be very clear to all of your listeners, when and if you're in the business long enough, you will get a visit by the SEC or state regulator at some point. When you do, it is a traffic cop pullover. And as Warren Buffett has very verbally said, if you are followed by a traffic cop for 500 miles, you will get a ticket. So what it's not, is it is not a criminal. You are not charged. Even though the SEC likes to say that you are not going to prison, you are not convicted. All of those words that we use relative to protections, again with habeas corpus and such is not relative to the sec. This is an ambulance chasing lawyer that comes to you and says you better settle. And their settlement is over 90%. So that's kind of the point of what it was. And having gone through it personally at a very high stake level, knowing that the business was very clean, knowing that, you know, specific actions were not taken that were, you know, inferred to by the organization and settling and following that, that impact is what led me to do that. And it actually led me to do my doctorate in law and policy because of looking at that and wanting to understand more. So how, you know, I, I guess being of an extra generation, when we were raised, we were, we were taught that, you know, you were innocent until proven guilty. And so I thought that was the sec. I thought that was state regulators and came to find out naively, but was never presented. That's not how it is. You are, you actually have to prove your innocence because it's a preponderance of evidence and they just overweight it. So that's probably way too much information relative to it sounds Too negative. There is a space for the sec. There's a space for regulators. I'm not anti regulators, anti regulations, anti laws. It's just that the regulators need to be reined in. And ideally, both the federal courts and the Supreme Court are starting to do that because there's enough, as they say, a policy window is opened and people are aware, and nobody, if they can take those rights away from you and me, anybody else can be next.

Yeah. Yeah. I mean, it seemed to me that the challenge of. Of the SEC being both kind of prosecutor and judge, you know, in the. In the. At the same time. Right. And the. This kind of.

This enforcement approach that they take, which, as you mentioned, in the vast majority of cases ends in. In settlement and not in a, let's say traditional settlement, but a settlement bound by a gag order, you know, by many right now is being viewed as kind of overstepping the original intent behind the SEC as a, you know, as a government regulator. Is that. Is that fair to say?

Yeah, it's fair to say. So first of all, the gag order or the first of all the settlements all come with a neither admit nor deny right. So that means you can't. Can't say I didn't do it, but you don't say, I did do it. That's akin to. In the United States, there's a number of case studies that show that if somebody takes the Fifth Amendment, which is a constitutional right not to say something bad about yourself that causes you to go to prison. Right. You do not have to. To give that testimony that. That automatically causes juries to believe that you did it. So automatically, just the setup of a neither admit nor deny says, well, you must have done it, otherwise you would have f. But when you're fighting this organization that, as you mentioned or touched on briefly there, and most people do not know understand this, they have.

An administrative legal system. So for people that understand our general setup of the country, you've got these three branches of government. You've got the legislative, you've got the executive, which is our president, and then you've got the judicial. Most people get that as our basics, and they understand that there's supposed to be checks and balances between it. What happens in this administrative group, which is underneath the executive order, is they have their own court, and that court has a judge that wears black robes just as though you think it's a real judge, but it's called an administrative law judge. And again, they're only ruling on civil matters. That. So you have to think of Judge Wapner or Judge Judy. This is the judge, right. They're sitting there and they're making a decision, and they're. So Judge Judy's boss is the network tv, right? She's got to give good show. Well, an administrative law judge of the SEC is the sec and at the end of the day, the commissioner. So if you lose in that administrative law, you can take it out of there and move into an actual federal court and start getting the jury of your peers or a judge scenario that's not hired by the administration and just clearly set up. Most people, even in the system, don't realize that, and it's a miscarriage of justice. And when we talk about places like Russia having kangaroo courts or China having kangaroo courts, the United States leads the way. And actually Russia and other countries are following our model to be able to bankrupt opponents to the large leaders of foreign countries that are more communist.

Yeah, yeah, it does seem incredible. And I know you made reference there to your, your, I think, weeks away from completing your, your Doctor of Law policy at Northeastern University. So I guess a pre. Congratulations on that. But never one to kind of sit still. I guess this is giving you more insights into, I guess, the legal challenges that are appropriate to make here against, you know, I guess regulators like the sec.

I'm not sure that there are many that compare directly to the SEC in terms of the sheer weight of.

Control that they have over these proceeds. But can you talk a little bit about what the experience is like? Not necessarily the detail, but the experience is like for a general partner who comes under the watchful eye of the SEC and what that actually entails. And then perhaps we'll take a look at, you know, how, how you can, you know, manage that and maybe even protect yourself against it.

So the first thing that I've seen happen is, is again, in the private capital place, even if, even if you do use a broker dealer, generally the general partner is not under the guise of the broker dealer. Maybe they are. And that's a whole different level of conversation that may be many of your people that do business with you that they are actually through the broker dealer. So they're going to have FINRA oversight as much as, and so oftentimes it's the FINRA call before it's the SEC call. And then you have, you know, again, when you have the SEC reach out and say, we want to do an exam, that's one thing. When you have the enforcement agency reach out with a subpoena and say we want everything in Your life going back, whatever period of time that is. And they really do push the envelope. And now recently, the government's opened it up to almost 10 years. Look back where that used to be 6 years or 4 years or 3 years, now it's 10 years look back type scenario.

And they're looking for, they can go.

On books and records, books and records.

So just think about the cost to the small entrepreneur that's raised even a $50 million fund.

Okay.

People think that you raise a $50 million fund, you have $50 million. Of course not. That's going into the project. You may have set Aside, you know, 2% of it maybe, but that's probably a high side. And you certainly didn't set aside a legal defense fund against the sec. So you've got to pull the books and records and hire an attorney. And by the way, most of the time when you hire the attorney, and if anybody is going through that, I highly recommend you check out icann, which is ican. You'll hopefully put the link up or NCLA or Publius Connect. You're going to want an SEC specific attorney. Well, when you call up the SEC specific attorney, if they're in a firm, they're in the white.

White collar crime division of that. This isn't a crime. This is a civil matter. Right. But that's actually where you start going down the deal, because the SEC can easily turn this over to the doj, Department of Justice, and then it does have criminal proceedings. And so the minimum check that you're going to end up writing to just respond is probably $50,000 or more. But it's a very long process. And it's not a process that's based off of, you know, most cases. Again, this sounds cynical, but in most cases, the person on the other side of that has assumed you are guilty, even though this is not an innocent or guilt, because this is a civil matter. But they will assume that you are in the wrong and they're going to find the data until they get an error, which again goes back to Warren Buffett's. If a police officer follows you for 500 miles, you're getting a ticket. So. And you can't speed up the process. You're like, hey, tell me where my fine is. Let's move on. Let's get, give me back to business. So it's a very big distraction setting those up, using good securities attorneys, not using, you know, the, the online. Hey, I can set up my fund just by going to legalzoom.com no bent against LegalZoom. But, you know, whatever it is, that's not where you want this. You need to understand the difference between state securities laws and interstate, which then brings in the sec. And just as a quick aside, I met with a person who had raised a fair amount of money, so starting in 2019, big money relative for apartment buildings. And they're all of a sudden into the sec, you know, multi state, multi investor area, and they want to start a new fund. And we started talking about the benefits of just raising in California with only you're doing a California property, California investors look at that and talk to your securities attorneys about just being in California.

Right.

The attorneys didn't necessarily bring that to our attention. Right. But all of a sudden that brings it down to you're dealing with a different regulator. But when you deal with the SEC, by the way, you're also dealing with potentially 50 fiefdoms of securities regulators across the country on top of the sec.

Right.

That's a lot of. Yeah, just in managing it, let alone no risk.

Yeah. So, so I mean, in practice it's, it's that the representatives from the SEC in each of those states could potentially put, pursue.

Or request that kind of.

Insight, or they do in many cases. So, and in many cases it's a small state, so they don't, they're not represented by this by the sec, they're represented at, by generally the attorney general of that state.

Right.

And then their securities division underneath their various state laws, which are, which vary from state to state to state. And so you will all of a sudden have a small state like Idaho or you know, even Utah pick up and say, yeah, you have three investors from our state, you violated this potentially or proved to us you didn't. Da, da, da, da. So you have a multi, multi face battle going on.

Yeah. And, and you know, from, from, from your experience, I mean, that, that comment that you made, which is it's, you know, guilty till proven innocent almost, you know, the exact opposite of what you might expect.

That is, that presents a real challenge, you know, apart from just pulling together the books and records, which for most companies, most funds, that's a challenge in and of itself because the breadth of that is, yes, it's the investment documents and it's all of the communications, it's the emails, it's, you know, any of the, any of the communications, it's the.

WhatsApp, it's the IMEI or whatever it's called of every single employee's cell phone.

Right.

Pulled up and all phone records so that, I mean, which pulls in them the personal phone numbers and all the various things that go into that are all potential. And you think that that sounds crazy, but it's, it's, you know, hundreds of thousands of potential documents.

Yeah.

When you're doing anything of any scale that then you know is, is looked at and it's on all sides. Right. To the communication, internal, external, all of that.

Yeah. And, and so I guess, I mean if you're putting that forward as, as proof, it's also something that is being.

I guess being assessed by your, by your own legal representation as, as part of a body of evidence of your, of your innocence etc. So that brings, with the time and expense and distraction from the business and various other. Quite apart from the potent, you know, reputational risk that comes from what's happening with your, with your, with your team, with your external investors, etc.

Yeah. No one likes to hear that the SEC has come calling.

Yeah.

And oh by the way, this is one of the most interesting parts of it which we've seen in many cases the SEC doesn't come calling and say, hey, we're investigating you. They're investigating, they've opened an investigation based off something else. So that's the name of the investigation. And then they get very broad authority in many cases, cases. And then within that broad authority they come in and they say this is just, we're just making an inquiry but you're under subpoena, please send all these documents and we're going to do this inquiry. And an inquiry can take up to four years and may go quiet for a year during that time. Right. And I'm not talking about dealing with fin or friend different. It's a, you know, it, it was designed to be a self regulating organization within this to, to alleviate some of those pains from the sec.

That still happens. FINRA is much more efficient about these processes, believe it or not. You're still probably going to get a fine, but it doesn't have the same implications.

And so within the sec, that whole process goes on. And you're right, Ferdie, it's not just that you may get a fine at the end of the day or that you had to pay for any of that. And by the way, they have a huge team of lawyers on their side. Everything that you send, your attorney's reviewing and their team.

Yeah.

And so every piece of paper now is doing that. And so you're not spending the time on the business, you're not growing the stuff. And I do want to say and this is a plug for asset class. And the other, you know, what you do out there, if you start from the very beginning with that in mind, both in your disclosures that this may happen, as well as in your setting up your documents, that every single WhatsApp, your, your, you know, all the various other communication things that you think you may be sneaky and getting around, sending a text message through, even if it's not to be anything negative, but you're sending a text to your wife that now can become part of the conversation. You know, your various emails, your personal email accounts, all the various aliases that are out there, every webpage, every blog that you've set anything on to becomes that. All of that gets looked at. Potentially.

Yeah.

And that's a cost. So that, that's a, that's a cost and a risk to be identified because as a general partner, all of a sudden you are no longer managing your business 100%.

Yeah.

And you have costs that ideally are indemnified by the limited partners that they're going to at least cover the costs. Yeah, right. From the business.

Right. Yeah. And, and I know, Tom, just based on your, on, on your own experience.

And I guess bolstered by, you know, further understanding from that experience, you know, the legal understanding that you have given your background.

What, what do you think is, is, you know, what's the desired state? I know you're advocating and, and engaging in various initiatives personally, and then at a broader level to kind of raise this as an issue.

What are you hoping to achieve with that? What do you think is a good outcome?

It's a great question. And completing this doctorate of law and policy is there is no such thing as creating a policy that is perfect. There's no such perfect policy. And there's also no way to create a policy that doesn't have unintended consequences. And, you know, as Monroe and Madison and Alexander wrote, you know, Hamilton all these years ago was, you know, if, if humans were angels, we wouldn't have this problem. But humans are in government, and so, and they're not angels. And so there has to be checks and balances and those type of things. And, and you know, we do have the government accounting, you know, office for Oversight, but that's bureaucratic in of its own mind. They do a great job in certain things. I think the biggest challenge is the understanding that the enforcement division of the SEC is designed around, hit first, hit publicly, and then everybody else falls in line. And so it's, it's, it's akin to A gangster movie where somebody walks up the gang, the new gangster walks up and either picks on the biggest person in the yard or the most notable person kills them, takes them out, breaks their knee, whatever. And if that person falls in line, then everybody else falls in line. Even if they don't agree with it, they're not going to say anything. And it sounds ridiculous. It sounds like it's out of the movies, but. But it's actually really how the process works. And so do we need regulation? Absolutely. Are there people out there who come up with an investment model that is purposely meant to take people's money? We've dealt with them. We've been taken by these people at times with all the due diligence and everything else you can do. It's a very sneaky process and it exists.

Right.

But also when you're making an investment, if an investment fails, is that because then the general partner or somebody else made a mistake?

Okay.

That's one part market change. They didn't see that. That's another part. Or they actually were trying to thieve from the investors and that's a whole nother part.

Yeah.

And that's, that's where, that's where it's gone askew. Is, is where is public disclosure? How much do we need to tell what's going on? What should have you known? This whole word of non scientor, non sient, or however you want to say it is. One is with knowledge and another is without knowledge. Well, again, people, you, the government particularly and finance sides, use the word fraud.

Fraud can simply be presenting something that is not accurate, even if you didn't know that it wasn't accurate. So you present that piece of paper and it's not even that you didn't know, but you should have known. It's that you didn't know. Somebody else handed you this and this is where that general partner piece comes in. And you even had due diligence on all those properties, but it ends up not being accurate. And you pass that piece of paper along on a civil matter, you committed fraud. You may not know, but it's fraud. It's not big F fraud, as the attorneys like to say, where DOJ is going to come in and you're going to lose your civil, your, your rights, you're going to go to prison, but you are going to lose a lot of money.

Right? Right.

Yeah. I mean, it is, it is crazy to, to see that kind of experience. I know you, you, you've had to live with that and not the Most.

Positive show you've had, by the way. I see all your other guests are always talking about everything. There is a good side to this.

Yeah, well, I think it's a, it's a good segue which is, you know, you can, there is a lot that you can do to prepare for this type of challenge and it is going to be there. And I think your expression earlier that it's not if, but when it happens, you know, how prepared are you? So on the one hand, and I appreciate the plug, we can certainly help with that, that's the class in terms of maintaining books and records and having a consolidated view of the, of all of your interactions, the truth, you know, as it were. But then on the other side there's kind of structural protections and things of that nature. And ever the entrepreneur, I know you, you're involved in lots of different things. But this personal experience, you know, you bring to bear and share with your clients of the brand group. But also as part of a new initiative around a new company, Laughlin Black, and wondered if you could maybe share a little bit of detail behind that and what the thesis is and the types of services that general partners will be able to avail of from that.

So there are, and thank you for that plug and truly about asset class and what you're building does present that platform, you know, through both artificial intelligence and just data storage and access to that can make the SEC process or FINRA process or other litigation things, when they do come up, when everything goes well, it's probably not all that important. They're making money and everybody's happy about it. Right. But when it doesn't go well, that's what it's about. And you need to do that right up front. Which, which also makes me think of, of when we get into Laughlin Black and the conversations, people will say, well, you set up these entities because you were trying to hide something. And I use the analogy of, okay, so let me see. I know that there's litigating attorneys, I know there's litigating federal agencies out there and I set up these to limit my personal liability of my family and myself. That's well within the ranks. Is that not the same as I'm a, you know, teenager and I decide there's criminals in the world and I'd like to take self defense classes. And so 25 years later someone mugs me and I'm a 5th degree black belt and I'm able to protect myself. Was that me being vicious in that attack? Because 35 years ago, I thought about I might get attacked.

Right, right, right.

So in setting up entities and setting up asset protection and the overall thought process, it's the old adage of the best time to do it, the best time to plant a tree is 30 years ago. The second best time is today. And so that's where we really brought together Laughlin Black, which was an association with a group and looking at all the entities and again, well over 200 entities and the interrelationship, management of those entities. And that becomes a business in of itself. And irrevocable trusts versus generation, skipping trusts versus a revocable trust, that's just your family to, you know, so you eliminate or mitigate probate issues are all very different pieces. Offshore trusts, the various parts that come into that. And what Laughlin Black is about is really managing that process because generally, the. The accounting team that you bring in knows a piece of the puzzle. The legal team that you bring in knows the entity piece or the SEC or the documents, formation of the securities documents, or they know the litigation risk, or they know the trust risk, but they don't know the whole group. And so this brings a family office model to that entrepreneur, that general partner that is building something that at the end of the day wants to be able to build regardless of the storms that are out there. And there will be storms. If you're in the business long enough, there will be storms. And it allows that. It doesn't have to be the entrepreneur who's generally very bright and capable of doing all these things and seeing a lot of them, but it takes their eyes off of running the business. So it becomes the family office side of running the business to give them the stability that presents ideas for. To make sure proper insurance coverages are in there, so that if, again, if you have a building burned down, that coverage was taken care of. If you have a key person that passed away, which you were with us when we lost my key partner. Right. And that. That is devastating to the entrepreneur. I mean, it's just devastating. And so all of those pieces are part of what Laughlin Black brings to the system, which is. And it is like the black card of American Express. It's not for everybody. Not everybody can afford it, and not everybody's at the level yet. But most everybody can start off with the green card and the green American Express and start moving their way up through the gold and the platinum and get to the black scenario. But with the idea, if you want to have.

An American Express black card, it's going to Be because you did all these processes along the way.

Yeah, yeah. Well, it's certainly very pertinent right now. I was reading just in the last week or so about, well, a number of funds that are being being challenged by, by their LP base and the defense that they're having to, to mount around this. And I, I, I'm sure it's very challenging for them to have to deal with that. But, but I guess just given the nature of what you outlined at the beginning, general partners, the exposure is significant. If you don't put these kind of protections in place and the kind of experience that you, that you got, both personally, but more appropriately professionally over the last 35 years or so, I mean, I've witnessed, you know, the challenges that come with challenging market environments as you have. It is just good business practice and encourage our listeners to learn a little bit more about that. Just on that topic, Tom, if people want to learn a little bit more about that, how should they, how should they do that?

Yeah, we're a pretty boutique exclusive group, as you and I were chatting about earlier. It's not the easiest thing to reach out to me. I am on, on LinkedIn, but I don't even think you get to connect to me type scenario. My team's all done that. The Brahan Group, I think it's under brahan group.com has a very basic understanding of what's out there and then, then the team will connect with it. I will say this about the general partnership scenario and if your listeners take one piece away that I'm very clear with, and I'm helping a group right now that's in an enforcement issue with an sec is the entrepreneur, the person, the general management.

We tend to use a lot of words that are inclusive, like we, my company, my idea. And that's where it starts getting into the differentiation of the liability of here's an entity versus it's actually a person at the end of the day. Right, right.

Yeah.

So, and it's one of those tough language things because we all like to say, like, yes, this is what we are building in our team. And then all of a sudden it becomes not that liability. So to that general partnership that is having challenges with their LPs, I implore you to go back and look at the documents and the management agreements. And this comes from a lot of experience is writing up things that say when it goes wrong. First of all, when an asset needs to be managed, I will tell you that a democratic approach does not work because every LP comes in with an idea. And most of them don't know anything about distressed asset management. Some do pull those people up, but by the GP's choice, not because you didn't have it in the documents and everybody's got an equal voice. That, that's one of the kind of main things that I put out there. They hire you and then if you move from being the manager when it's things are great to the manager that thinks when they suck. Make sure have a compensation plan in there as well because if the bankruptcy court has to come in, that bankruptcy trustee is going to get compensated. So why wouldn't you get compensated during those times? But if it's not in the agreements, it becomes very challenging. So all of the agreements should be done for both the success as well as when things don't go right. And the big success is when things don't go right and you actually are able to fix it because you had good documents in place. Yeah, so that doesn't answer the question. We are there for consulting purposes and partners participate and still fund obviously a number of ventures and, and love looking at the deals. So coming through the Brehon Group is probably the best way. And by the way, since, since you are my Irish brethren and the real one living in the country type scenario, do you know even know the background of Brehon?

I'm familiar with the Brown laws, the seventh century laws. Yeah, I'm familiar with them. Some interesting ones in there.

But that's when they go back. So we're talking. This is, this is pre. What we have and we claim for English laws prior to the, to the.

The, the laws of England. Yeah, yeah, yeah.

So that, that, that is where that is. You know, it's been a company we've had since, since 2008.

Yeah.

And it honors our Irish heritage. But it, it is a part of that and it has to do with the simple parts of. You know, it gets down to logic and how do you look at it and how do you. But they're not simple decisions. It's not black and white.

Right, right. Yeah. One actually, as we're in February, one of the brand laws that I remember just because it was kind of odd and my wife's birthday is in February, so which is why I remember it. But one of the brand laws is that if you needed to. And this is, this shows how progressive they were. This is the seventh century. But if you needed to leave your wife, you could only leave on the 1st of February. So you had to wait until then and then you could leave her but once a year.

But it was a once a year scenario. I remember that because it was a scenario of what a great idea. Once a year you kind of both come together and you say, this last year kind of sucked. Do we want to go another year or should we break up now?

That's it. That's it. Now, I hasten to add, because my wife does listen to this, that I'm very happily married.

Yeah. Well, Tom, as ever, I mean, there's definitely an opportunity for us to record a couple of other episodes here. In particular, I'd like perhaps as part of our founder series, to share some of the experience that I had with you with the Six Secrets of Raising Capital. So perhaps we can encroach a little bit more on your time at some point in the future to talk about that. But for this episode, Tom, it's been an absolute pleasure to reconnect with you to learn a little bit more about. About the, I guess the sec, the regulatory oversight, the challenges that come with that, but more importantly, the steps can take to manage that risk. Tom, thanks very much for your time. I appreciate you joining us here on the People of Private Capital.

Bernie, thank you. And thank you to your team and asset class. You guys are doing great work out there and continue to be a big fan. Take care.

Thanks. Thanks, Tom.