Blackstone Settles SEC Fee Disclosure Case for $39M

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Rob Tricchinelli

Oct. 7 — Three private equity advisers that are part of Blackstone Group LP agreed to pay nearly $39 million Oct. 7 to settle SEC allegations that they made inadequate disclosures about fees to their fund clients (In re Blackstone Mgmt. Partners LLC, SEC, Admin. Proc. File No. 3-16887, 10/7/15).

Blackstone Management Partners LLC, Blackstone Management Partners III LLC and Blackstone Management Partners IV LLC didn't admit or deny wrongdoing. Of the settlement, nearly $29 million will be returned to investors through a recovery fund, the Securities and Exchange Commission said. The remaining $10 million is a civil penalty.

The agency said the firms failed to disclose when monitoring agreement fees could be sped up upon an agreement's end. They also failed to tell fund clients about a disparity in legal fees between what Blackstone was charged and what those clients were charged, the SEC said.

Disclosure

Blackstone is the largest private equity manager to face a formal enforcement proceeding on fees, in what was the fourth such case brought by the agency.

“Our clear message to the entire private equity industry is that this an area of great risk and that whatever the success of the funds over time, hidden or inadequately disclosed fees will not be tolerated regardless of the size of the adviser,” SEC Enforcement Director Andrew Ceresney said in a conference call with reporters.

In June, Kohlberg Kravis Roberts & Co. settled with the SEC in connection with misallocating expenses for unsuccessful deals to its private equity funds.

The agency also settled similar fee cases against Lincolnshire Management Inc. and Clean Energy Capital LLC in 2014.

Monitoring

As part of its advisory business, Blackstone charged monitoring fees to portfolio companies owned by funds that Blackstone advised, typically in 10-year terms and occasionally with automatic renewal.

In its agreements with the companies, Blackstone could collect the remaining present value of the monitoring fees in case, for example, the portfolio company was sold or went public.

“While Blackstone disclosed its ability to collect monitoring fees to the Funds and to the Funds’ limited partners prior to their commitment of capital,” the SEC said, it didn't disclose its practice of taking the present value of remaining fees until it already collected them, which was the violation.

Nearly $29 million of the settlement will go to “to compensate the Funds and limited partners” that invested in private equity transactions from 2010 to 2015, the settlement said.

“This SEC matter arose from the absence of express disclosure in marketing documents, ten or more years ago, about the possible acceleration of monitoring fees, a common industry practice,” Blackstone spokesman Peter Rose said in an e-mailed statement. “Each accelerated fee was, however, as the SEC order acknowledges, disclosed when received and our Limited Partner Advisory Committee did not exercise its right to object.”

Discounts

Blackstone also had an agreement to receive discounted legal work from a firm that was “substantially greater” than the discounts received by the private equity fund clients, the SEC said.

This disparity in discounts was not disclosed to the funds from 2008 to early 2011, until an internal audit led to the end of the discount between Blackstone and the firm, which the SEC didn't identify. In 2012, Blackstone notified the funds of the disparity, according to the SEC's filing.

“Blackstone voluntarily made changes to the applicable policies well before this inquiry was begun,” Rose said.

Blackstone was represented by Simpson Thacher & Bartlett LLP in New York.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com