Tag: Apollo

The One With the Pilfering Partner

Expenses charged by private equity managers to their portfolio companies and their funds has been on the SEC’s radar since Dodd-Frank. Apollo Management was one of those caught with improper fee calculations last year. One item mentioned was the inappropriate expenses charged to the funds by one of its partners. We got more detail on that issue when the SEC brought charges against Mohammed Ali Rashid, a former senior partner at Apollo Management.

From at least January 2010 to June 2013, Mr. Rashid allegedly misappropriated $290,000 from the Apollo funds my charging personal expenses to the funds and their portfolio companies. The SEC states that there more than one thousand personal items and services charged to the funds.

Apparently, it first started in 2010 when Apollo discovered the personal charges and made Mr. Rashid repay those costs. But that did not stop him. Apollo found more instances and ended his employment in February 2014.

According to the complaint, he took steps to conceal the charges. He identified a personal salon trip as a business lunch in one instance. It was his administrative assistant that turned him in the first time. She found problems with the expense reimbursement forms for a restaurant she could not find. She ran the problems up the management chain.

Undeterred by the scolding, he continued using the corporate account as a personal charge card. He claimed to purchase items identified as gifts to portfolio company executives. Gifts they never received. He charged a personal vacation to the fund, claiming it was a business trip.

His assistant turned him in again when he falsified a clothing purchased. He had pre-approval from compliance to spend $3500 on ties to some of the portfolio company executives. When his assistant called the store for a receipt, it turned out to be a charge for Rashid’s father’s suit. Apollo slapped him on the wrist again and made him re-pay these inappropriate charges.

The firm took what seems to have been the appropriate steps and ran a full forensic review of Mr. Rahid’s expense account. As a result of the review, Apollo placed him on unpaid leave. Mr Rashid self-identified $220,000 in improper charges. The review came up with an additional $60,000. All of which he re-paid as Apollo showed him the door.

According to the SEC complaint against the firm, Apollo had self-reported the problem to the SEC.  That did not stop the SEC from including this problem in the larger order related to improper fee charges to the funds last year.

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SEC Brings Another Private Equity Fund Fee Case

Apollo has been variously recognized as a god of sun, truth, healing, and poetry, and more in classical Greek and Roman mythology. It’s namesake private equity firm has settled charges with the Securities and Exchange Commission that it was less than truthful in disclosing fees charged to investors.

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The main thrust of the Apollo case was over monitoring fees. Apollo, like many private equity firms, charged a monitoring fee to its portfolio companies. The SEC has previously announced its distaste for these fees, especially when the fees relate to periods after the sale of the portfolio company.

Apollo disclosed in its fund documents that it charge monitoring fees. The SEC felt that Apollo did not adequately disclose that sometimes these fees would be accelerated upon the sale of a company and therefore earn a fee for period where there was no company to monitor.

I believe this practice has largely stopped in the private equity world or the disclosure is now more robust regarding this standard industry practice.

Regardless, it was a big chunk of change. The order lists $37 million of disgorgement.

In addition to its distaste of monitoring fees, the SEC did not like a loan from the funds to the management company. It’s not clear from the order what was going on with the loan, but it looked like a vehicle to defer taxes on carried interest. The fatal flaw for the SEC was that the accrued interest on the loan was allocated to the fund’s GP which was not fully disclosed in the financial statements.

Lastly, one of Apollo’s senior partners charged personal items to the funds in violation of the Apollo’s policies. This conduct was repeated. Apollo ended up firing the partner and making him (or her) repay the expenses. Apollo self-reported this to the SEC.

But still the SEC decided to include that expense infraction in this order.

Private fund compliance professionals have been focusing on fees and expenses. To me the monitoring fee is a leftover from a few years ago when the SEC announced its distaste for the practice. It’s not clear to me what impact the loan had on the fund investors.

Clearly, the fund investors were made whole by the malfeasance of the senior partner. Apollo did everything right in that context, including self-reporting. I’m not sure why the latter item had to be part of a big, public enforcement action.

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