How Private Equity Firms Defraud Investors By Extracting ‘Fees’ From Their Portfolio Companies

The modern private equity industry got its start in 1979 when, for the first time, a large, publicly traded company was taken private in a leveraged buyout. For the next 30 plus years, the industry escaped regulatory oversight by the Securities and Exchange Commission (SEC) by adopting complex and opaque organizational structures designed for that purpose. That changed with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the recent financial crisis. Since 2012 most mid-size and large private equity funds have been required to disclose their activities to the SEC. Last week reports of what the SEC found began to leak out. Staff at the SEC has reviewed about 400 private equity funds. What did they learn? According to Bloomberg, the SEC found that in about half the cases, general partners of the PE funds have collected fees and expenses from companies owned by the funds without telling the pension plans and other fund investors about the fees. In a civil case filed last month against one PE firm, the SEC charged that the firm collected more than $3 million in fees that it used for its own office and other expenses – money that should have been disclosed and shared with investors in the PE fund. Some 200 PE firms were found to have engaged in such abusive behaviors. More on Forbes here.