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Private Equity Advisers Settle SEC Charges, Highlighting The SEC’s Continued Scrutiny Of Private Equity Firms
08/29/2016On August 23, 2016, four Apollo Global Management advisers, each organized as a Delaware limited partnership, agreed to pay a total of roughly $52.7 million (including $37.527 million in disgorgement and a $12.5 million civil penalty) to settle the SEC’s investigation of alleged breaches of fiduciary duty stemming from, among other things, a failure to disclose accelerated fees paid by Apollo funds’ portfolio companies and alleged misrepresentations about which entity would ultimately be allocated the interest that accrued on a loan. SEC Press Release, Apollo Charged With Disclosure and Supervisory Failures, Rel. No. 2016-165 (Aug. 23, 2016). The advisers neither admitted nor denied the SEC’s allegations, which were made as a part of a settled cease and desist order alleging violations of the Investment Advisers Act of 1940.
The allegations against Apollo arose in part after companies owned by Apollo-advised funds agreed to pay Apollo annual “monitoring fees” in exchange for receiving consulting services related to the companies’ business affairs. Although Apollo disclosed to investors that it might receive these fees, the SEC asserted that Apollo improperly failed to disclose that, as a matter of practice, it would exercise a contractual right to accelerate such fees before selling any portfolio companies. Specifically, the SEC reported that Apollo accelerated the payment of future monitoring fees by terminating its monitoring agreements with portfolio companies when those companies were sold. In the Matter of Apollo Management V, L.P., et al., File No. 3-17409 (Aug. 23, 2016). The SEC contended that these accelerations occurred between 2011 and 2015 and resulted in lump sum payments to the Apollo advisers, effectively reducing the relevant portfolio companies’ value prior to sale and the amounts available to distribute to Apollo fund investors. Id.
The SEC also alleged that one of the Apollo advisers failed to disclose certain information about a loan agreement. Specifically, the SEC claimed that after two portfolio companies were recapitalized, multiple Apollo funds (the “Lending Funds”) together loaned one of the Apollo advisers approximately $19 million in carried interest. The Lending Funds loaned the adviser that money immediately after the recapitalization in 2008 to defer the taxes owed on the carried interest. Yet according to the SEC, although the Lending Funds reported interest income from the loan, the Lending Funds failed to disclose that the interest income actually was ultimately allocated instead to the adviser’s capital account.
While the manner in which advisers are paid and how they allocate income and expenses almost always creates potential conflicts of interest and challenging disclosure decisions, notably absent from the case was any allegation that the investors were in fact misled by the statements highlighted by the SEC or that the investors would have made different investment decisions with more fulsome disclosure. Instead, remarking on the Apollo settlement, director of the SEC enforcement division Andrew J. Ceresney said simply that “[a] common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors.” Indeed, both the settlement and Director Ceresney’s remarks signal the Commission’s continued focus on private equity firms and disclosure of potential conflicts of interest. Even where advisers believe investors will not be harmed or would approve of a given practice, the SEC can review all disclosures with a highly critical eye.
