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SEC reaches $52.7 mln settlement with Apollo, its largest in PE to date

  • SEC finds fault with monitoring-fee disclosure, some expenses
  • SEC says firm failed to disclose certain interest payments
  • Apollo had reserved $45 mln; neither admits nor denies allegations

Apollo Global Management agreed to settle with the Securities and Exchange Commission for $52.7 million after the agency alleged that the firm misled investors and failed to protect fund clients from inappropriate expenses.

The settlement is the largest the SEC has secured from a private equity firm since it started regulating the industry as part of the 2010 Dodd-Frank Financial Reform Act.

Apollo, which has $186 billion under management, will compensate fund investors with $40.3 million and pay a $12.5 million civil penalty. The firm did not admit or deny wrongdoing.

Disclosure of action, set-aside

Apollo in February disclosed the possibility of an SEC enforcement action. The firm set aside $45 million “in connection with an ongoing SEC regulatory matter principally concerning the acceleration of monitoring fees from fund portfolio companies,” according to a filing.

As with a similar settlement reached with Blackstone Group, the SEC found that in limited-partner agreements, Apollo failed to disclose its ability to collect accelerated monitoring fees from portfolio companies upon exit.

The firm did disclose the collection of accelerated monitoring fees in financial reports regularly sent to funds’ limited partner advisory committees, Apollo said in a statement.

More than 95 percent of Apollo’s settlement amount relates to disclosure of accelerated monitoring fees, according to a source familiar with the firm.

The SEC first spotlighted accelerated monitoring fees in 2014, when former compliance and examinations chief Andrew Bowden used them as an example of hidden fees charged by PE firms.

In addition to settlements with Blackstone and Apollo, the regulator has reportedly investigated other firms for similar arrangements, including Carlyle Group and Silver Lake.

According to a Buyouts analysis of SEC filings, roughly 20 percent of firms disclose their ability to collect accelerated fees. Apollo, however, no longer collects accelerated monitoring fees, according to the person with knowledge of the firm.

Notification

In addition to improperly disclosing monitoring fees, the SEC also found the firm failed to notify investors of interest payments it collected through a loan arranged between Apollo Investment Fund VI and four affiliated lending funds.

After recapitalizing two portfolio companies in 2008, Apollo used parallel funds to take out a $19 million loan against carried interest owed to the GP, according to the SEC’s order. The firm did not tell investors that interest payments on the loan would be allocated to the fund adviser’s capital account.

“To put this in perspective, Fund VI was a $10.4 billion fund. The loan was terminated in two stages in 2011 and 2013. At no time were fund investors any worse off as a result of the loan. The loan to Apollo was fully disclosed in the footnotes to Fund VI’s financial statements,” the Apollo statement says. “The SEC took issue with the disclosure regarding the allocation of the accrued interest on the loan.”

Personal expenses

Finally, the SEC also found that a senior Apollo partner charged personal items and services to Apollo funds and portfolio companies. Apollo launched an internal investigation in 2012 and the partner was put on administrative leave a year later. He stepped down from the firm in early 2014.

“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 Kelly, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement.

The firm and the SEC did not identify the ex-senior partner. The SEC’s investigation into the former senior partner is continuing.

“The executive agreed to a formal separation agreement with the firm after repaying all of the personal expenses he improperly charged as well as the cost of the internal review conducted by Apollo. Apollo reimbursed its funds for any improper expenses, voluntarily reported the matter to the SEC and cooperated fully with the agency’s review,” the firm wrote in its statement.

Action Item: Read the SEC’s findings at www.sec.gov

Leon Black, chairman, CEO and director of Apollo Global Management. Photo courtesy Reuters/Lucy Nicholson