Apollo fined $52.7m for misleading investors

November 2016  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

November 2016 Issue

November 2016 Issue

Apollo Global Management and the Securities and Exchange Commission (SEC) announced in August that Apollo had agreed a $52.7m settlement following charges that it misled investors about fee practices and did not prevent a senior partner from charging personal expenses to clients.

In a statement released by the Commission, the SEC said that it had charged New York-based Apollo with failing to sufficiently disclose to its fund investors that it planned to collect large one-time fees from companies it sold or took public. Such fees are not exclusive to Apollo; indeed, they are a widespread practice throughout the private equity (PE) industry, allowing big buyout firms to collect, in some cases, tens of millions of dollars for services they did not actually perform.

The $52.7m Apollo agreed to pay is the largest settlement to date by a PE firm in the agency’s broad examination of the industry and fee practices.

By agreeing to the fine, Apollo has become the latest in a string of PE organisations to feel the effect of a sweeping, industry-wide investigation into whether or not PE firms put their own interests ahead of investors. In recent years, the SEC has taken action against a number of private equity firms, including other industry heavyweights such as the Blackstone Group and Kohlberg Kravis Roberts & Co. Apollo’s executives, according to the claims made against them by the SEC, failed to “adequately disclose the benefits they received to the detriment of fund investors by accelerating the payment of future monitoring fees”.

According to the SEC, an Apollo executive, who was not named or charged, was twice caught “improperly charging personal items and services” to Apollo’s funds and, by extension, its investors. “Apollo failed to take appropriate action to protect its clients upon first learning that a partner was improperly expensing personal items and services to the funds, and its failure resulted in repeated misconduct,” said Anthony S. Kelly, co-chief of the SEC enforcement division’s asset management unit.

The SEC has noted that it is concerned about the way in which Apollo, and other members of the PE industry, are less than clear with their investors, often hiding certain facts and details. “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,” said Andrew J. Ceresney, director of the SEC enforcement division. “Investors in Apollo funds were not adequately informed about accelerated monitoring fees and separately allocated loan interest, and therefore were unable to gauge their impact on their investments.”

The $52.7m Apollo agreed to pay is the largest settlement to date by a PE firm in the agency’s broad examination of the industry and fee practices.

In a statement announcing the settlement, Apollo said that it “seeks to act appropriately and in the best interest of the funds it manages at all times. Long before the SEC inquiry began, Apollo had enhanced its disclosure and compliance relating to these matters”. Apollo, which neither admitted nor denied the accusations, added, “This SEC matter primarily arose from the absence of specific disclosure in Apollo’s limited partnership agreements for Funds VI and VII concerning the possibility that monitoring fees owed to Apollo might be accelerated upon the IPO or sale of a fund portfolio company, a common industry practice. Despite the lack of specific disclosure in the original limited partnership agreements, the disclosure concerning the nature of fees that might be charged was extremely broad. The SEC acknowledges that Apollo was transparent with its limited partners about such fees in other documents”.

Away from the issue of the monitoring fees, the SEC also took Apollo to task for “failing to supervise” a senior executive who, from early 2010 to mid 2013, was believed to have been charging personal items to Apollo investors. The executive accused of the malfeasance is believed to have submitted “fabricated information to Apollo in an effort to conceal his conduct”, according to the SEC. It is alleged that the firm knew about the executive’s conduct and yet put no noticeable measures in place to discipline the individual responsible. Apollo simply issued a verbal reprimand and prompted the executive to repay the expenses. No further action was taken until the firm hired an independent firm to audit the expenses. Following this audit, Apollo simply severed its relationship with the executive. In spite of the settlement agreed between the SEC and Apollo, the Commission has confirmed that it will continue to investigate the executive’s actions and the firm’s response. “As the SEC acknowledges, Apollo itself discovered and remediated the expense account misconduct committed by a partner several years ago as part of a periodic compliance review of expenses,” the firm said in its statement. “Apollo reimbursed its funds for any improper expenses, voluntarily reported the matter to the SEC and cooperated fully with the agency’s review.”

Apollo has not been the only PE firm in the regulatory line of fire. The SEC has made the monitoring and regulation of PE fees one of its top priorities and as such has conducted a multi-year investigation into fee disclosure at PE firms, resulting in several enforcement actions against firms that often involved accelerated monitoring fees. In 2015, both The Blackstone Group and KKR & Co. were fined by the regulator over the way they informed investors of fund costs. However, the SEC’s case against Apollo is arguably the most prominent to date, given the size of the settlement.

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Richard Summerfield

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