Earlier this week, four private fund advisers affiliated with Apollo Global Management agreed to a $52.7 million settlement. During an investigation by the SEC, the advisers were found to have misled fund investors about fees and a loan agreement, as well as failed to supervise a senior partner who charged personal expenses to the fund.
More specifically, the Apollo advisers did not fully disclose the benefits they received by accelerating the payment of future monitoring fees owed by the funds’ portfolio companies upon the sale or IPO of those companies. As a result, the portfolio companies’ value was decreased prior to their sale or IPO and what could be distributed to fund investors was reduced.
In addition to the four advisers’ misconduct, Apollo’s supervisory failures continued when a then-senior partner at the firm was caught expensing personal items and services to the fund. This was done not once, but twice. However, instead of taking disciplinary action, the firm simply gave the senior partner a verbal reprimand and required repayment of the expenses. Later, a firm-wide expense review discovered that numerous personal expenses were improperly charged to fund clients. This ultimately resulted in the partner’s separation from the firm.
The SEC’s investigation, which is continuing, found that Apollo violated Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. It also determined that Apollo failed to properly supervise the then-partner pursuant to Section 203(e)(6) of the Advisers Act. As a result, Apollo will have to pay $37.527 million in disgorgement and $2,727,552 in interest, which will be distributed to the affected fund investors, as well as a $12.5 million penalty.
Having strong internal controls is paramount for detecting adequacy of investor disclosures and supervision of personnel. Evaluating an organization’s internal controls should be on an ongoing basis, both by internal personnel and periodically by third-parties, who often are able to detect gaps that might otherwise go undetected.
For more information on what to look for in an internal control structure, or to find out more about third-party reviews, contact us at (619) 298-2880, or email firstname.lastname@example.org. Thank you.