The SEC announced that three private equity fund advisers within The Blackstone Group have agreed to pay nearly $39 million to settle charges that they failed to fully inform investors about benefits that the advisers obtained from accelerated monitoring fees and discounts on legal fees. Blackstone did not admit or deny the findings.
According to the SEC, from at least 2010 through March 2015, upon either the private sale of a portfolio company or an initial public offering (“IPO”), Blackstone terminated certain portfolio company monitoring agreements and accelerated the payment of future monitoring fees as set forth in the agreements. Although Blackstone disclosed that it may receive monitoring fees from portfolio companies held by the funds it advised, and disclosed the amount of monitoring fees that had been accelerated following the acceleration, Blackstone failed to disclose to its funds, and to the funds’ limited partners prior to their commitment of capital, that it may accelerate Future monitoring fees upon termination of the monitoring agreements.
In addition, the SEC alleged in late 2007, Blackstone negotiated a single legal services arrangement with its primary outside Law Firm on behalf of itself and the funds. For the majority of legal services performed by the Law Firm beginning in 2008 and continuing through early 2011, Blackstone received a discount that was substantially greater than the discount received by the funds. The disparate legal fee discounts were not disclosed to the funds or the funds’ limited partners until August 2012.
The SEC believes that because of its conflict of interest as the recipient of the accelerated monitoring fees and the beneficiary of the disparate legal fee discounts, Blackstone could not effectively consent to either of these practices on behalf of the funds it advised. As a result, the SEC believes Blackstone breached its fiduciary duty to the funds in violation of Section 206(2) of the Advisers Act and also violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.