KKR Refunds Investors for Wrongly-Charged Fees

one dollar bill

In response to an SEC examination, private equity firm KKR & Co. has refunded some fees it charged investors in a handful of its funds.

The SEC last year said that some firms were charging investors “hidden fees” without proper disclosure.

From the Wall Street Journal:

KKR’s refunds were disclosed in a pension-fund document obtained by The Wall Street Journal through an open-records request. The precise amount of the refunds couldn’t be determined, but a Journal analysis suggests one set of refunds likely amounted to less than $10 million, while the other may have been similar in size or smaller.

KKR declined to comment on its discussions with regulators.


According to the notes, KKR officials said the SEC determined that the private-equity firm from 2009 to 2011 had allocated certain expenses to its private-equity funds that “should not have been allocated to the funds.”

As a result, the notes said, KKR gave “fee credits” to the investors in those funds. The sums were blanked out, but the total of such credits was listed as “$X million,” and the credit to the Washington state pension fund was listed as “$X thousand.”


The SEC staff also found fault with the way KKR handled disclosure of fees it collects from steering portfolio companies into a group-purchasing program run by a company called CoreTrust Purchasing Group, the notes show.

Read the full WSJ story here.


Photo by c_ambler via Flickr CC License

Massachusetts Pension Waited a Year to Disclose Hedge Fund Troubles


For more than a year, the Massachusetts Bay Transportation Authority (MBTA) Retirement Fund didn’t publicly disclose the problems plaguing a hedge fund that held MBTA money.

Those problems included civil fraud charges filed against the firm, Weston Capital Asset Management, which is now shutting down.

From the Boston Globe:

In its annual report, released Dec. 10, the $1.6 billion pension fund for transit workers said that it removed its money from Weston Capital Asset Management in September 2013. Nine months later, Weston Capital unraveled as federal securities regulators filed civil fraud charges against the firm and its top executives for allegedly draining $17 million from one of its hedge funds to other accounts and to themselves.


With Weston Capital, the T fund appears to have escaped unharmed. But investment specialists said changes in leadership and ownership at the firm at the time the agency was investing should have raised suspicions.

For instance, the firm’s chief investment officer left just months before the MBTA pension committed money to it. And five months after the T invested, Weston Capital’s founder and chief executive, Albert Hallac, agreed to sell the firm to a financially troubled company — a deal that would ultimately fall apart.

“Turnover is never good in that kind of a situation. You’re [investing] based on their record and their proven results,’’ said Timothy Vaill, the former chief executive of Boston Private Financial Holdings Inc., a banking and investment firm. “If you’re going to be hiring third-party managers, you’ve got to deeply dive into their world.”

A spokesman for the pension fund, Steve Crawford, said in an e-mailed statement that officials did not learn of the Securities and Exchange Commission’s investigation of Weston Capital until this year. But sometime in 2013, he said, the pension fund “initiated discussions with other” investors in the same hedge fund to withdraw their money.

It’s not the first time the MBTA fund has invested money with a troubled hedge fund. From the Boston Globe:

The T’s pension fund said it did not lose money on its 2009 Weston Capital investment. But this is the second time in a year the secretive MBTA retirement fund has belatedly acknowledged problems with its investments.

Last December, the Globe reported that the pension fund had lost $25 million on a hedge fund run by Fletcher Asset Management in New York — an investment recommended by the T fund’s former executive director, Karl White.

In that case, too, the pension fund did not keep close tabs on a risky investment. White had persuaded the trustees in 2007 to commit $25 million to Fletcher, his new employer. White left Fletcher the next year without telling the T. By 2011, the pension fund could not get its money out of Fletcher, which filed for bankruptcy protection in 2012. It was another year before the pension fund disclosed the loss to the public.

The MBTA Retirement Fund manages $1.6 billion in assets.


Photo by  Paul Becker via Flickr CC License

Chicago Lawmakers Request SEC Investigation Into Donations to Emanuel From Investment Firms With City Pension Contracts

Rahm Emanuel

Chicago aldermen announced yesterday they were requesting an SEC investigation into donations received by city Mayor Rahm Emanuel from investment firms that manage the city’s pension money.

From the International Business Times:

The aldermen scheduled a City Hall news conference Tuesday to announce the action.

In a letter to Andrew Ceresney, who directs the SEC’s division of enforcement, Aldermen Bob Fioretti, Scott Waguespack and John Arena write the donations constitute “pay-to-play actions” that “have violated the public trust and are a breach of the fiduciary duty” by the Emanuel administration officials who oversee the city pension systems. They say “Chicago has a deep history of pay-to-play” and that their “goal is to end these tactics and protect the citizens of Chicago and employees’ investments.” 

In a speech last week, Ceresney vowed increased enforcement of the SEC’s pay-to-play rule, which was passed in 2011 after an influence-peddling scandal at the New York State pension system.

The SEC and Emanuel’s office did not respond to IBTimes’ request for comment. In a statement about the donations emailed to Bloomberg News, Emanuel’s campaign manager asserted the donations comply with “the higher standards the mayor voluntarily imposes on himself per his executive order” banning contributions from city contractors. 


On top of the request for an SEC investigation, the aldermen are asking for the city’s inspector general to conduct a review of whether the donations violate Emanuel’s own executive order barring campaign donations from city contractors and subcontractors.

They are also asking Emanuel to release a full list of all the financial firms managing the city’s $23 billion pension system — including the firms in pooled investments known as a “fund-of-funds.” IBTimes obtained documents showing executives at a firm managing Chicago pension money through two Chicago pension systems’ fund-of-funds had made significant campaign contributions to Emanuel.

A copy of the letter sent to the SEC can be read below:

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Photo by Pete Souza

Pension Scandals Put Christie In Deep Hole

Chris Christie pension scandal

Over at Naked Capitalism, Yves Smith has written a great post recapping the recent pay-to-play allegations surrounding Chris Christie and Robert Grady and untangling the web of relationships at the heart of the scandal. The post, in full, is below.


By Yves Smith, Naked Capitalism

Memo to Chris Christie: when you are in a hole, quit digging.

If you have any appetite for political slugfests, an unusual one is playing out in New Jersey. Former Pando, now International Business Times reporter David Sirota has been digging into dubious connections between officials in various states who have influence over pension fund investments and their well-heeled Wall Street connections and patrons.

To give a very short summary of Sirota’s biggest current story, the IBT journalist has uncovered questionable connections with two prominent figures, Charlie Baker, who is a Republican gubernatorial candidate in Massachusetts, and former New Jersey pension fund chief Robert Grady.

First, a short background on the Baker story: Sirota showed how that Baker made a $10,000 donation to the New Jersey Republican Party shortly before Christie officials gave Baker’s firm a pension management contract. That donation ran afoul of the Garden State’s pay-to-play rules that bar contributions from executives and partners of entities that manage state pension funds.

New Jersey launched an investigation into Sirota’s charges and announced that as a result, it was exiting the contract with Baker’s firm.

In a sign that Sirota is drawing blood, Christie himself, as well as members of his administration, have launched personal attacks on Sirota rather than making honest rebuttals to his charges (another strategy has been to misrepresent the stringent requirements of the state pay-to-play law). The paper of record in Massachusetts, the Boston Globe, has yet to deign to report on this scandal.

Sirota has also been probing the relationships among state pension fund investments and the holdings of long-standing Christie friend and pension fund overseer Robert Grady. The Christie administration has denied, forcefully, that Grady had any financial interest in firms that benefitted from New Jersey pension fund investments on his watch. That word “interest” is critical, because that’s the term of art in the New Jersey pay-to-play law. And in reading the discussion that follows, bearing in mind that New Jersey rules bar state officials from “being involved” in “any official manner” in which they have direct or indirect personal or financial interest.*

From the article:

Grady was pursuing a new strategy, shifting money into hedge funds and private equity holdings in the name of diversification and higher returns. He was now pushing to entrust up to $1.8 billion of New Jersey pension money to the Blackstone Group, one of the largest players in private equity.

But one special feature of that Blackstone bet underscores the interlocking relationships at play as states increasingly rely on the counsel and management of Wall Street institutions to invest their pension dollars: One of the private equity funds New Jersey was investing in – a pool of money called Blackstone Capital Partners VI – claimed among its investors a Wyoming-based company named Cheyenne Capital. That company’s list of partners included one Robert Grady.

In short, Grady was pushing to invest New Jersey public money in the same Blackstone fund in which his own firm was investing — without disclosing that fact to N.J. officials.

There are two legs to Sirota’s charges. One is that Grady’s firm looks to have gotten preferential treatment from Blackstone. Documents from an SEC investigation state that Cheyenne made a total investment in the Blackstone fund of $2.69 million. That is well below its minimum investment requirement of $20 million.

Due to the opacity of these investments, it is impossible to ascertain whether Cheyenne might have gotten other concessions, such as reduced fees in the fund itself, by lowering the management fees or the performance fees paid by investors in the fund.

Another way that private equity funds reward preferred parties is by giving them co-investment rights, which allows them to invest in the portfolio companies directly and bypass fees at the fund level. We explained how that works last year:

Let’s look at a particularly egregious conflict involving the Boston law firm Ropes & Gray. Ropes is Boston’s ultimate Brahmin firm, with a pedigree dating back to 1865. Past partners including Henry Cabot Lodge and Archibald Cox.

Industry insiders report that Ropes does the legal work for Harvard’s investments in private equity funds… Ropes & Gray also represents two of Boston’s leading PE firms: Bain Capital and Thomas H. Lee Partners

The March 6, 1998 Federal Register contained an application to the SEC by Ropes & Gray to form an in-house 1940 Act “investment company” that would be owned by the employees of the firm in order to invest their capital. Critically, as part of its investment company application, Ropes sought and was granted by the SEC an exemption from the normally comprehensive and ongoing public reporting requirements to the SEC that investment companies normally provide.

How has RGIP been investing the Ropes partners’ money? Thanks to the SEC waiver, it’s impossible to know everything. But RGIP appears regularly as an investor in Bain and Thomas H. Lee (another top Boston-based PE fund) deals.

Pay attention, because the distinction I’m about to make is critical to understanding how stinky this is. I am not talking about RGIP being an investor in Bain and Thomas H. Lee funds. To the extent that were the case, RGIP’s interests would be aligned with Harvard as a fellow fund investor, since they’d be in all the same deals, be subject to the same gains and losses, and presumably pay the same or similar fees.

Instead, Ropes & Gray, Harvard’s counsel, is investing alongside Bain and Thomas H. Lee funds in which Harvard is an investor. From an economic perspective, Ropes & Gray is investing ahead of Harvard, because it is not paying the fees a limited partnership investor pays. Moreover, it may well be in an even more advantaged position by virtue by getting access to only the best deals (as in cherrypicking within the funds**) and could potentially better rights on other fronts than its client.

Let me stress: we have no evidence that Cheyenne got this sort of sweetheart deal. But we also can’t be certain that it didn’t. The cult of secrecy around private equity investments means the public, including New Jersey taxpayers, has no idea of knowing, beyond the concession on the minimum investment, whether Grady’s firm got other sweeteners as a result of the New Jersey investment in the same fund. And that is precisely why the New Jersey statues are so draconian on the issue of possible personal and financial conflicts of interest.

Grady provided strenuous denials that he has an “interest”; those statements don’t pass the smell test. As private equity industry expert Eileen Appelbaum remarked:

“Whether or not he has a direct piece of the action from this particular investment, he is a partner in the company that is going to benefit from the investment,” said Eileen Appelbaum, an economist at the Center for Economic and Policy Research and author of the book “Private Equity at Work.” “If the investment in Blackstone turns out to be profitable, his company is going to benefit from that.”

And don’t kid yourself that Grady was too remote to have had anything to do with the pension fund investment in Blackstone VI:

State Investment Council records show that Grady himself made the formal motion to approve the Blackstone deal, and then voted for it along with most members of the council. Former State Investment Council member Jim Marketti told International Business Times he had no recollection of Grady disclosing his firm’s investment in Blackstone at the time Grady had the council vote on the Blackstone investments.

Another questionable relationship involves the same Blackstone fund’s salvage of Knight Capital. Grady was on the board of Stifel, which was a significant customer of Knight and also joined in the rescue.

The details:

In August 2012, Blackstone Capital Partners VI used money from its investors to finance a deal involving Knight Capital Group, according to SEC documents. Knight had notably suffered losses in the wake of news that a computer glitch in its electronic trading system had sent share prices plummeting on the New York Stock Exchange. The infusion of Blackstone money stopped the bleeding. Blackstone had been joined in its rescue of Knight by another firm, Stifel Financial, which later acquired a piece of Knight’s trading and sales operations. Among the members of Stifel’s board was Grady, according to corporate documents.

According to SEC documents, Grady also owns more than 10,000 shares of the company’s stock, and N.J. financial disclosure forms show Grady is compensated for his position at Stifel.

In short, Blackstone Capital Partners VI applied its investors’ money — including funds from the New Jersey pension system — to co-invest with Stifel, whose board included among its ranks the overseer of New Jersey’s pension investments.

Does this look arm’s length to you? Factor this into your assessment:

[Christopher] Santarelli, the New Jersey Treasury department spokesman, said Grady’s State Investment Council would have no knowledge or influence over how Blackstone opted to invest the money in its fund. Yet a New Jersey investment official previously declared that state officials often influence the financial decisions of the private equity funds in which the state invests.

“We’re a large player,” said then-Division of Investment executive director Timothy Walsh, in a May 2011 interview with the Bergen Record. “We have impact.” He told the newspaper that state pension officials sit on advisory boards for most of the private equity firms with which New Jersey invests, adding that New Jersey’s pension system is better able to influence private equity firms’ decisions than those of companies whose stock it owns.

The New Jersey state pension system listed 600,000 shares of Stifel in its portfolio in 2013, according to the New Jersey Department of Treasury’s annual report. Stifel executives made $15,000 worth of contributions to the New Jersey Republican Party in 2011, according to campaign finance disclosures.

Assemblyman John Wisniewski, who heads the state’s Select Committee on Investigation, is pushing for an official probe into l’affaire Grady.

Even though it seems unlikely in the cesspool of New Jersey politics, it is still entirely possible that Robert Grady’s conduct regarding his dealings with Blackstone, both with the fund investment and the Knight rescue, were on the up and up. But even so, he clearly looks to have violated the state’s stringent laws about conflicts of interest.

And this case serves as yet another object lesson in how private equity’s draconian secrecy policies can foster corruption. Even if it didn’t actually occur here, it would be easy for it to have taken place.

*Clearly, this restriction would not apply to cases where a pension fund executive held a public stock and a New Jersey pension fund bought shares in the same stock. The impact of the New Jersey buy, if any, would be too small and short term for the state official to derive any benefit.