WASHINGTON Blackstone Group, the world's largest private equity firm, will pay about $39 million to settle civil charges over disclosure failures in connection with certain types of fees it charged its portfolio companies, U.S. regulators said on Wednesday.
The settlement between Blackstone and the Securities and Exchange Commission marks the second major case in the regulator's ongoing crackdown into what it sees as a widespread industry problem concerning how buyout firms allocate and disclose various kinds of fees.
Blackstone's case centers on the so-called acceleration of monitoring fees that the New York-based firm was collecting from its portfolio companies prior to their sale or initial public offerings.
The SEC said that the payments Blackstone received "essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors."
It also said that fund investors were not informed as well about another separate fee arrangement that got Blackstone a discount on services provided by an outside law firm.
The SEC said Blackstone's discount on the legal fees was "much greater" than the discount the funds received.
Although Blackstone did disclose its ability to collect monitoring fees prior to when investors committed capital, the agency said it did not disclose its practice of accelerating monitoring fees until after it had pocketed them.
In a statement, the company said issues at the heart of the SEC's case date back about 10 years, when the acceleration of monitoring fees was a common industry practice.
In such arrangements, Blackstone charged fees to its portfolio companies for consulting and advisory work. Before the companies were sold, Blackstone would terminate the monitoring agreements and accelerate the payment of future fees.
"Blackstone voluntarily made changes to the applicable policies well before this inquiry was begun," a company spokesman said.
The SEC's enforcement division also said Wednesday that its review of private equity fee and expense abuses remains ongoing, and the regulator urged fund advisers to come forward and self-report similar issues.
By doing so, the SEC said, companies are more likely to get credit for their cooperation in settlements.
Of the roughly $39 million that Blackstone will pay to settle the case, about $29 million of it will be distributed back to affected investors.
In settling with the SEC, Blackstone neither admitted nor denied any wrongdoing.
(Reporting by Sarah N. Lynch; Editing by Alan Crosby and Christian Plumb)