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...
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.
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.
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.”
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 email@example.com
To contact the editor responsible for this story: Phyllis Diamond at firstname.lastname@example.org
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)