OOPS!  PE Out of Pockets Trip Up Adviser

October 26, 2017

Private equity funds, in contrast to registered funds, may have provisions in their investor documents permitting the funds to be charged with various out of pocket expenses.  Sometimes this leads to trouble.

That's the case in a recently filed action by the SEC, which claims that a partner at Apollo Management committed fraud by charging personal expenses to private equity funds managed by Apollo.  The partner is alleged to have charged almost $300,000 in personal expenses to the funds.  Such expenses included vacations, haricuts, meals and an expensive suit.  The SEC notes in its complaint that Apollo discovered the fraudulent expense reports, requiring the partner to refund the money, but the firm failed to implement ways to prevent the partner from filing false expense claims.  Incidentally, it is noteworthy that the partner made millions in his role as an Apollo partner.

Implications:   First, private equity firms and their partners/PMs have fiduciary duties to their funds just as managers of other funds do.  Second, when malfeasance is discovered, appropriate steps should be taken to prevent recurrence.

Link to action:  SEC v. Mohammed Ali Rashid