Wednesday, September 21, 2016

S.E.C. Issues $53 Million Fine Against Apollo Global Management

Why was Apollo Global charged with securities law violations?

The Securities and Exchange Commission (S.E.C.) recently lobbed a roughly $53 million fine against private equity firm Apollo Global Management for several securities law violations.  Apollo has agreed to settle the case, resolving accusations that the firm misled investors.  Apollo is the latest in a string of private equity firms to come under the scrutiny of the S.E.C.  Over the past few years, the federal agency has taken action against ten private equity firms, including several prominent players in the industry.  S.E.C. oversight seems rooted in concern that many private equity firms are not being transparent with their investors.

Hidden Fees and Undisclosed Loans

Apollo has been charged with concealing important details from investors.  The firm failed to fully explain to investors its policies concerning “monitoring fees.”  Apollo charges monitoring fees to some of the companies it owns in exchange for its consulting provided to these companies.  While the fees can actually benefit investors by helping to offset the fees charged by Apollo to investors, Apollo concealed a critical aspect of these fees.  Apollo developed a policy of accelerating its monitoring fees when one of its companies went public or was sold.  The lump sum fees charged upon the sale or I.P.O. of a company served to reduce the amount available for distribution to fund investors.  Investors were left in the dark as to this acceleration policy and its potential impact on their returns.

In addition, Apollo did not disclose details about a loan it took from some of the company’s private equity funds.  Under the loan agreement, Apollo was responsible for paying interest to the funds, but instead it kept the interest and justified its retention of the funds as its share of profits from certain investments.  While Apollo claims these actions did not negatively impact investors in any way, the S.E.C. found this failure to disclose, coupled with the hidden monitoring fees, amounted to violations of securities law.

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