An SEC investigation found that Blackstone Management Partners, Blackstone Management Partners III, and Blackstone Management Partners IV failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering.
The payments to Blackstone essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors. The SEC investigation also found that fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount that the law firm provided to the funds.
“Full transparency of fees and conflicts of interest is critical in the private equity industry and we will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here, ” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
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“As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees, ” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “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 consented to the entry of the SEC’s order finding that it breached its fiduciary duty to the funds, failed to properly disclose information to the funds’ investors, and failed to adopt and implement reasonably designed policies and procedures. Without admitting or denying the findings, Blackstone agreed to cease and desist from further violations, to disgorge $26.2 million of ill-gotten gains plus prejudgment interest of $2.6 million, and to pay a $10 million civil penalty. Blackstone agreed to distribute $28.8 million to affected fund investors. The settlement reflects Blackstone’s remedial acts and its voluntary and prompt cooperation with the Division of Enforcement’s investigation.
