Apollo pays $52.7m in settlement with SEC

The settlement, which centres on improper fees and conflicts of interest disclosure to limited partners and supervisory failure, includes a $12.5m penalty. It comes less than a year after Blackstone settled with the SEC for similar issues.

Apollo Global Management has agreed to a $52.7 million settlement with the Securities and Exchange Commission, the SEC announced in a Tuesday statement.

The regulator charged the firm for allegedly misleading limited partners in four funds about fees and a loan agreement, and for failing to supervise a senior partner who charged personal expenses to several funds.

The four fund advisers are Apollo Management V, Apollo Management VI, Apollo Management VII, managers of Apollo Investment Fund V, VI and VII, respectively, and Apollo Commodities Management.

Some of Apollo's LPs in those funds include the California Public Employees' Retirement System, the California State Teachers' Retirement System, the Canada Pension Plan Investment Board, the Florida State Board of Administration, the Oregon State Treasury, Partners Group, the Milken Family Foundation, ATP Private Equity Partners, Teacher Retirement System of Texas, Portfolio Advisors and the Kuwait Investment Authority, according to PEI data.

A spokesman for Apollo said the firm consistently seeks to act in the best interests of the funds it represents.

“Long before the SEC inquiry began, Apollo had enhanced its disclosure and compliance relating to these matters, reflecting the firm's commitment to uphold the highest standards of governance and transparency as it focuses on delivering exceptional value to its fund investors.” 

Apollo agreed to cease and desist from further violations without admitting or denying the findings. It must pay $37.5 million in disgorgement and $2.7 million in interest that will be distributed to affected fund investors, and a $12.5 million penalty.

As of 30 June, Apollo said in a quarterly statement with the SEC it had already increased its legal reserve by $52 million in connection with the case.

SEC findings 

In July 2015, the SEC sent an informal request for information regarding fee disclosures to LPs. 

Following the investigation, the SEC said it found four private equity fund advisors affiliated with Apollo had failed to adequately disclose the benefits they received to the detriment of fund investors by accelerating the payment of future monitoring fees owed by the funds' portfolio companies upon exiting those companies

“A common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors,” said Andrew Ceresney, director of the SEC enforcement division.

“Investors in Apollo funds were not adequately informed about accelerated monitoring fees and separately allocated loan interest, and therefore were unable to gauge their impact on their investments.”

When firms accelerate future monitoring fees, the lump sum received by fund advisors essentially reduces the portfolio companies' value prior their sale or initial public offering and reduces amounts available for distribution to LPs.

Apollo is not the first private equity firm targeted for disclosure failures. In October, Blackstone agreed to pay nearly $39 million to settle charges that some of its fund advisors failed to fully inform investors about benefits that they obtained from accelerated monitoring fees and discounts on legal fees. The settlement included a $10 million penalty.

“Despite the lack of specific disclosure in the original limited partnership agreements, the disclosure concerning the nature of fees that might be charged was extremely broad,” said Apollo's spokesman. “The SEC acknowledges that Apollo was transparent with its limited partners about such fees in other documents.  In fact, during the period at issue, Apollo disclosed each accelerated fee in detailed schedules provided on a regular basis to each fund's limited partner advisory committee.

The investigation also said it found that one of the four advisors, Apollo Management VI – the investment advisors for Apollo Investment Fund VI, failed to disclose certain information about interest payments made on a loan between the advisor's affiliated general partner and five funds.

The purpose of the loan was to defer taxes on carried interest due to the general partner, the SEC said, adding that disclosures related to the allocation of the loan accruing interests in financial statements was misleading.

“At no time were fund investors any worse off as a result of the loan,” Apollo's spokesman said. “The loan to Apollo was fully disclosed in the footnotes to Fund VI's financial statements.  The SEC took issue with the disclosure regarding the allocation of the accrued interest on the loan.

Another issue the SEC noted in the statement is Apollo's alleged supervisory failures pertaining to a former senior partner at the firm who was caught twice improperly charging personal items and services to Apollo-advised funds and their portfolio companies. The SEC said that Apollo verbally reprimanded the partner and required repayment of improperly submitted expenses but took no further remedial or disciplinary steps on either occasion. 

“The executive agreed to a formal separation agreement with the firm after repaying all of the personal expenses he improperly charged as well as the cost of the internal review conducted by Apollo,” said the firm's spokesman.

“Apollo reimbursed its funds for any improper expenses, voluntarily reported the matter to the SEC and cooperated fully with the agency's review.”

According to a source familiar with the matter, the investigation related to the senior partner is ongoing.