KKR & Co. agreed to pay almost $30 million to settle the charges filed by the Securities and Exchange Commission (SEC) for allegedly misallocating broken deal expenses.
Allegations against KKR
According to the SEC, KKR misallocated more than $17 million of broken deal expenses to its flagship private equity funds, which is considered a violation of its fiduciary duty.
Based on the investigation of the Enforcement Division of the Commission, KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and similar expenses during a six-year period ended 2011.
The SEC found that KKR did not allocate any portion of the broken deal expenses to any of its co-investors and executives, who were also part of the transactions and benefited from the deal sourcing efforts of the private equity firm.
The Commission said KKR did not disclose in its fund limited partnership agreements or related offering materials that it did not allocate broken deal expenses to its co-investors.
First case against private equity firm with misallocating broken deal expenses
The Asset Management Unit of the Enforcement Division has been scrutinizing the private equity industry to ensure that fund managers are not misallocating or unfairly changing fees and expenses to investors.
Andrew J. Ceresney, director of the Enforcement Division, emphasized that KKR was the first private equity firm charged with misallocating broken deal.
“Although KKR raised billions of dollars of deal capital from co-investors, it unfairly required the funds to shoulder the cost for nearly all of the expenses incurred to explore potential investment opportunities that were pursued but ultimately not completed,” said Ceresney.
On the other hand, Marshall S. Sprung, co-chief of the Enforcement Division added that KKR breached its fiduciary duty by failing to adopt policies and procedures governing broken deal expense allocation.
According to Sprung, “A robust compliance program helps investment advisers ensure that clients are not disadvantaged and receive full disclosure about how fund expenses are allocated.”
KKR agreed to pay more than $14 million in disgorgement ($3.26 million was previously refunded to clients), more than $4.5 million in prejudgment interest and $10 million penalty. The private equity firm also agreed to the entry of the SEC’s order that it violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.