The U.S. Securities and Exchange Commission (SEC) announced that three private equity fund advisers within Blackstone Group L.P. (NYSE: BX) have agreed to pay nearly $39 million to settle charges that they failed to fully inform investors about benefits that the advisers obtained. Out of the $39 million, nearly $29 million of it will be distributed to affected investors.

According to the report, the 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.

What happened was that the payments to Blackstone reduced the value of the portfolio companies prior to sale, which was to the detriment of the funds and their investors. The SEC 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.

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. According to the SEC’s order instituting a settled administrative proceeding:

• Blackstone typically charges a monitoring fee to each portfolio company owned by its funds. The fee covers advisory and consulting services to the portfolio company and typically is for a ten-year period.
• Before the private sale or initial public offering of certain portfolio companies, Blackstone terminated monitoring agreements and accelerated the payment of future monitoring fees, including in some instances when monitoring services would no longer be provided. Some of the accelerated fee payments were used to offset management fees.
• Blackstone disclosed its ability to collect monitoring fees prior to investors’ commitment of capital but did not disclose its practice of accelerating monitoring fees until after it took the fees.
• Blackstone also failed to disclose a legal fee arrangement providing it with a much greater discount on its legal fees than the discount the funds received.
• Blackstone negotiated the arrangement with a law firm that performed a substantial amount of legal work for Blackstone and its funds. The funds generated significantly more legal fees than Blackstone did.
• Blackstone also failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940.

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Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said:

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.

Shares of Blackstone were down 2.1% at $33.99 on Thursday afternoon. The stock has a consensus analyst price target of $45.19 and a 52-week trading range of $26.56 to $44.43.

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