August 25, 2016
Joseph N. DiStefano
Apollo Global Management, the $186 billion-asset private-equity firm whose bosses include Sixers lead owner Josh Harris, has agreed to pay $53 million to settle Securities and Exchange Commission complaints that the firm reduced returns available to its clients, including the Pennsylvania state pension fund (SERS), by inadequately disclosing fees it collected from companies it bought with their cash before selling them or taking them public. (Revised)
Apollo "failed to adequately disclose the benefits they received, to the detriment of fund investors," when it speeded up "monitoring fees" it collected from firms in 2011-15, the SEC said in its statement. Since it controlled the companies it was collecting those fees from, Apollo faced a "conflict of interest" it wasn't making clear to its clients, SEC said here (see Summary, paragraph I).
SERS invested $90 million in two Apollo funds covered by the settlement, plus more than $75 million in other Apoll0 funds. Apollo has paid tens of millions in profits for SERS since it first invested state funds in 1998, after returning principal and deducting reported and unreported fees.
Apollo's settlement included $40.3 million in fee "disgorgement" and interest to be repaid to Pennsylvania and other clients, plus a $12.5 million penalty to the SEC.
“Apollo seeks to act appropriately and in the best interest of the funds it manages at all times," the firm told me in an emailed statement.
The payments Apollo collected from companies it invests in -- before clients like Pennsylvania get their own share -- are "a common industry practice," Apollo said in its statement, adding that the payment schedules were "provided on a regular basis" to clients' investment advisers.
SERS did not immediately respond to a request for comment on how much the state paid Apollo to manage those funds, or how much it expects to collect from Apollo as part of the SEC settlement. SERS might collect around $120,000, taking into account the size of the state's investment as a percentage of the funds, if "monitoring" fees were collected and split evenly across the Apollo funds named in the settlement. Apoll0 representatives declined to comment.
Apollo also manages tens of millions of dollars for the Philadelphia city pension system and for PSERS, the state teachers' pension system, through Apoll0 investment funds that aren't named in the SEC settlement.
PSERS records showed Apollo collected around $8 million in fees for managing more than $300 million in retail, debt and private-equity investments from the school pension system last year alone.
PSERS and Philadelphia officials said their investments weren't affected by the settlement. PSERS spokeswoman Evelyn Williams told me PSERS is represented on the boards of the Apoll0 funds that handle its money and the reps check the fees carefully. (Updated)
While most of the Apoll0 settlement went to compensate investors for monitoring payments, $2 million of the total was attributed to questionable spending by Apoll0 or its officials, according to the SEC.
The agency said an Apoll0 holding company "failed to disclose" information on an internal loan designed to reduce tax obligations below the already-low 15 percent typically paid on hedge fund and private equity investor income. Apollo's clients should have been told about all such payments and "conflicts of interest," Andrew J. Ceresney, Director of the SEC Enforcement Division, said in the agency's statement.
Apollo also allowed an unnamed former official to "improperly charge personal items and services" to firms Apollo invested in, the SEC said. In that case, “Apollo failed to take appropriate action to protect its clients,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. (Revised)