The SEC entered a final judgment against defendant Stuart Frost, a California-based private fund manager and exempt reporting adviser (ERA). Frost and his advisory firm were charged in 2019 for defrauding five venture capital funds by charging over $14 million in undisclosed incubator fees to the companies in which the funds invested. The funds invested in a portfolio of start-up companies with an emphasis on big data analytics and cloud computing. A Frost-owned company, Frost Data Capital (“FDC”), created the portfolio companies and purportedly provided services to “incubate” the portfolio companies in anticipation of a sale or acquisition. In return for the support services, the portfolio companies paid incubator fees to FDC. However, the complaint alleges that such fees were used to pay FDC's overhead, an exorbitant salary and extravagant personal expenses of Frost. The SEC noted that when Frost needed more cash to fund his lavish lifestyle, including a personal chef and housekeeper, an archery range, beach club membership, a boat, and luxury cars, he created new start-up companies, invested more fund capital in them, and then used FDC to extract additional incubator fees. The SEC alleged that Frost failed to disclose the existence and/or amounts of the incubator fees and also charged the funds undisclosed and improper management fees, in violation of his fiduciary duty. The SEC scrutinizes fees charged to portfolio companies, how such fees relate to and impact fund management fees, and the adequacy of disclosures related to the existence and amounts of such fees, and related conflicts. Even where there is no flagrant misappropriation, firms should closely review such practices and related disclosures.