According to the SEC, it will distribute nearly $29 million out of the total settlement to the affected fund investors.
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
SEC allegations against Blackstone
The SEC alleged that Blackstone Management Partners, Blackstone Management Partners III, and Blackstone Management Partners IV did not provide investors with enough information regardings the benefits obtained from accelerated monitoring fees and discounts on legal fees.
The Commission said the three Blackstone private equity fund advisers failed to disclose adequately the acceleration of monitoring fees paid by fund-owned portfolio companies prior to its sale or initial public offering (IPO).
According to the SEC, the value of the portfolio companies before the sale was effectively reduced by the payments to Blackstone, which was a disadvantage to the funds and its investors.
Blackstone also failed to adopt and implement written policies and procedures to prevent violations of the Investment Advisers Act of 1940.
Blackstone violated its fiduciary duty
In a statement, SEC Division of Enforcement Director, Andrew J. Ceresney emphasized, “Full transparency of fees and conflicts of interest is critical in the private equity industry.” He added that they will continue to take actions against advisers that fail to disclose their fees and expenses adequately, just like what Blackstone did.
On the other hand, Julie M. Riewe, co-chief, Asset Management Unit of the Enforcement Division said, “Blackstone violated its fiduciary duty by failing to properly disclose the fees” since it is the beneficiary of the accelerated monitoring fees.
She added, “Blackstone further breached its fiduciary duty by choosing to negotiate a legal fee arrangement with greater benefits for itself than the funds it advised, without properly disclosing the arrangement.”
Blackstone agreed to cease and desist from committing further violations without admitting or denying the findings of the SEC. The firm agreed to disgorge $26.2 million of ill-gotten profits and prejudgment interest of $2.6 million and agreed to pay a $10 million civil penalty.