SEC Busts Apollo for Disclosure and Supervisory Failures
The SEC charged four private equity fund advisers affiliated with Apollo Global Management for misleading fund investors about fees and a loan agreement and failing to supervise a senior partner who charged personal expenses to the funds. Apollo did not admit or deny the SEC’s findings. According to the SEC:
Apollo entered into certain monitoring agreements with portfolio companies that were owned by Apollo-advised funds. Pursuant to the terms of the monitoring agreements, Apollo charged each portfolio company an annual monitoring fee in exchange for rendering certain consulting and advisory services to the portfolio company concerning its financial and business affairs. From at least December 2011 through May 2015, upon either the private sale or an IPO of a portfolio company, Apollo terminated certain portfolio company monitoring agreements and accelerated the payment of future monitoring fees provided for in the agreements. Although Apollo disclosed that it may receive monitoring fees from portfolio companies held by the funds it advised, and disclosed the amount of monitoring fees that had been accelerated following the acceleration, Apollo failed adequately to disclose to its funds, and to the funds’ limited partners prior to their commitment of capital, that it may accelerate future monitoring fees upon termination of the monitoring agreements. Because of its conflict of interest as the recipient of the accelerated monitoring fees, the SEC believes Apollo could not effectively consent to this practice on behalf of the funds it advised.
Also, in June 2008, Apollo Advisors VI, L.P. (“Advisors VI”) – the general partner of Apollo Investment Fund VI, L.P. (“Fund VI”) – entered into a loan agreement with Fund VI and four parallel funds (collectively, the “Lending Funds”). Pursuant to the terms of the loan agreement, Advisors VI borrowed approximately $19 million from the Lending Funds, which was equal to the amount of carried interest then due to Advisors VI from the Lending Funds. The loan had the effect of deferring taxes that the limited partners of Advisors VI would owe on their respective share of the carried interest until the loan was extinguished. Accordingly, the loan agreement obligated Advisors VI to pay interest to the Lending Funds until the loan was repaid. From June 2008 through August 2013, when the loan was terminated, the Lending Funds’ financial statements disclosed the amount of interest that had accrued on the loan and included such interest as an asset of the Lending Funds. The Lending Funds’ financial statements, however, did not disclose that the accrued interest would be allocated solely to the capital account of Advisors VI. The SEC believes the failure by Apollo Management VI, L.P. (“AM VI”), the Fund VI investment adviser, to disclose that the accrued interest would be allocated solely to the account of Advisors VI rendered the disclosures in the Lending Funds’ financial statements concerning the loan interest materially misleading.
In addition, from at least January 2010 through June 2013, a former senior partner at Apollo improperly charged personal items and services to Apollo-advised funds and the funds’ portfolio companies. According to the SEC, Apollo failed reasonably to supervise the Partner, with a view to preventing violations of the federal securities laws within the meaning of Section 203(e)(6) of the Advisers Act.
And, as always, there is the related tag along charge that Apollo failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act arising from the undisclosed receipt of accelerated monitoring fees and failed to implement its policies and procedure concerning employees’ reimbursement of expenses.
In connection with the enforcement action, the SEC granted Apollo a waiver from ineligible issuer status under Rule 405 of the Securities Act.
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