On October 7, 2015, the US Securities and Exchange Commission announced that three private equity fund advisers within The Blackstone Group (“Blackstone”) agreed to pay approximately $39 million to settle charges regarding their failure to inform investors about benefits that the advisers received from accelerated monitoring fees and legal fee discounts. Nearly $29 million of the $39 million will be distributed to fund investors impacted by the disclosure failures.
According to the SEC’s order, Blackstone breached its fiduciary duty by failing to adequately disclose to fund investors the acceleration of monitoring fees paid by certain portfolio companies owned by its funds prior to the companies’ sale/initial public offering. In essence, these fees reduced the value of the companies prior to their sale. The SEC order states Blackstone further violated its fiduciary duty by negotiating a legal fee arrangement for services by an outside law firm that provided greater discounts for itself than the funds, without adequately disclosing such arrangement to fund investors.
Without admitting or denying the findings by the SEC, Blackstone consented to the entry of the SEC order. Blackstone agreed to cease and desist from further violations and to disgorge $26.2 million of ill-gotten gains as well as prejudgment interest of $2.6 million. It further agreed to pay a civil penalty of $10 million.
The SEC press release is available at: http://www.sec.gov/news/pressrelease/2015-235.html and the SEC order is available at: http://www.sec.gov/litigation/admin/2015/ia-4219.pdf.