Blackstone to Pay Nearly $39M to Settle SEC Probe into Fee Disclosures

Oct 7 2015 | 11:15pm ET

Blackstone Group has agreed to pay nearly $39 million to settle U.S. Securities and Exchange Commission claims that three of its fund advisor affiliates failed to properly disclose fee arrangements and vendor discounts to investors.

According to the SEC, Blackstone Management Partners, Blackstone Management Partners III, and Blackstone Management Partners IV advisers did not adequately inform investors about accelerated monitoring fees paid by portfolio companies. According to the SEC, the payments reduced the value of the portfolio companies before their sale. 

The SEC complaint also alleged Blackstone failed to disclose a legal fee arrangement providing it with a much greater discount on its legal fees than the discount received by the funds, which generated significantly more legal work. 

"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," said Andrew Ceresney, director of the SEC's Division of Enforcement, in a statement. 

The settlement is comprised of $28.8 million in disgorgement and interest, which will be distributed to investors, and a $10 million civil penalty. 

Blackrock neither admitted nor denied the allegations. 

“As the beneficiary of the accelerated monitoring fees, Blackstone violated its fiduciary duty by failing to properly disclose the fees,” said Julie 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.”

The monetary sanctions resolve the SEC’s allegations against Blackrock, which is the world’s largest private equity manager. Blackrock is the largest firm yet to face scrutiny from the SEC on private equity fees following KKR’s $28.5 million settlement in June.

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