Private Equity Double Standard: California’s John Chiang, Other State Officials Happily Ding Headline-Grabbing Wells But Look Other Way With PE

As the old saying goes, a politician is someone who gets in front of a mob and calls it a parade.

A lot of pent-up frustration over the failure to do anything serious about pervasive bank misconduct has blown up with Wells Fargo in its settlement involving over 2 million fake customer accounts. The sheer scale of the activity, and the fact that for over 500,000 of bogus credit card accounts, it sometimes also involved purloining funds from deposits to cover fees, has led not just to a firestorm of criticism from Congressmen of both parties, but has also led state treasures to suspend their business with the miscreant bank. California’s John Chiang was first out of the box, saying he’d use other banks for a year and was quickly followed by Illinois’ Michael Frerichs, who announced a open-ended freeze.

But as Gretchen Morgenson pointed out in the New York Times, private equity firms have been required to pay much more in restitution to investors than Wells Fargo has or expects to pay. Wells Fargo has doled out $2.4 million in purloined monies; its settlement with the CFPB, OCC, and Los Angeles City Attorney called for it to set aside a total of $5 million for this purpose.

Needless to say, that’s much smaller than the pilferage that the SEC identified in recent settlements, such as $40.3 million for Apollo, $29 million for Blackstone, and $18.7 million for KKR.

Morgenson focused on Apollo and identified 13 public pension fund investors who’d put at least $100 million Apollo VII funds that the SEC said had been fleeced in its order (CalPERS, on whose board Chiang sits, has $800 million committed to Apollo VII). She confirms the pattern we’ve seen again and again: these fiduciaries, who by law are required to put the interest of their beneficiaries first, make it clear that making nice with private equity firms is actually far more important to them.

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In an email to Mr. Chiang’s office, I asked whether he’d put Apollo into the penalty box as he’s done with Wells Fargo. No response. O.K. What about the other public pension fund officials who invest with Apollo?….

Some funds didn’t respond; one declined to comment. And some said they had responded to the S.E.C. case by increasing their demands for fee transparency from Apollo and other investment managers. That’s not enough to move the accountability needle.

Others like Calpers and the California State Teachers’ Retirement System told me they were monitoring the Apollo situation. Fine, but isn’t that their job?

Matthew Sweeney, a spokesman for the New York State comptroller and overseer of the Common Retirement Fund, seemed to indicate that assessing an investment firm’s potential return took a higher priority than weighing a manager’s integrity.

“The fund will continue to review all investment opportunities based on their ability to meet its standards of risk and return,” he said in a statement. Apollo says that the VII fund has had strong returns since its inception in 2008.

In response to my questions, other pension officials said that some ethical flaws were to be expected or that Apollo had been transparent about its fees. “Given the size and breadth of our portfolio and our investment manager network, it is likely that there will be occasional lapses,” Dennis D. MacKee, spokesman for the Florida Board of Administration, said in a statement. “To the extent these occur, the forthrightness with which they are addressed, both to remedy any damage done and prevent recurrence, is what we focus on,” he said.

The view these fiduciaries took on Apollo’s breach could not be clearer: There’s nothing here. Move along.

This is simply a continuation of the sort of shirking of duty we’ve called out repeatedly. For instance, a group of state treasurers the New York State and City comptrollers called for the SEC to deliver them more private equity transparency…something they were perfectly able to advance on their own. From a July 2015 post:

If you didn’t know better, and the tacit assumption is that the dumb chump public does in fact not know better, you might easily think a letter by state officials to SEC chairman Mary Jo White amounted to meaningful action. Here’s …:

A group of states and cities said it intends to send a letter to the Securities and Exchange Commission late Tuesday asking for greater transparency and more frequent disclosures by private-equity funds…

This is patently ridiculous.

The SEC does not have the authority to order more frequent fee and expense disclosures. The information that the investors receive now is what they have obtained in their negotiations at the time they invest. They can calculate management fees from one of the documents they sign, the subscription agreement; they should be able to derive the so-called carry fees from annual audited fund financial statements. Those audited financial statements also contain fund-level expense information.

These limited partners have chosen, for decades, to give private equity general partners a blank check by allowing them to use the portfolio companies purchased with the limited partners’ monies as piggy banks, with virtually no checks or oversight. Critically, the limited partners have no right to see the financial statements of the portfolio companies, nor do they get information about transactions or business arrangements between the portfolio companies and parties related to the general partner and its owners, employees, and affiliates…

The elected officials who are asking the SEC to intervene on their behalf are all board members or trustees of pension funds that have agreed to sign remarkably one-sided agreements with private equity general partners. So why, pray tell, have they sat pat and allowed this sort of thing to go on?

Admittedly, later that year, Chiang did rouse himself to say he’d sponsor a bill that would provide transparency for all private equity fees charged to California funds. As we discussed, the resulting bill, AB 2833, was quickly watered down and can readily be circumvented. An easy proof that the bill won’t inconvenience the secretive private equity industry? It didn’t get a single opposing vote in either house of the California legislature.

So while it is good to see state officials get on the Wells Fargo bandwagon, bear in mind they’ve done so only after the bank become a safe target. By contrast, they’ve sat on their hands as far as private equity is concerned, when they have an actual duty, as opposed to garnering headlines, at stake.

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4 comments

  1. Chris Darling

    I live in California and am looking at who is lining up to run for governor. They all look corrupt. So far, we have Gavin Newsom, John Chiang and Antonio Villaraigosa. Not impressed with any. The only state level elected official who does not look corrupt is Betty Yee, but, so far, hardly a word about her running.

  2. Ivy

    Private equity may have to make some adjustments based on how carried interest is coming under more scrutiny now, including mentions in last night’s debate. Chiang et al have an opportunity to broaden their approach and to tighten their requirements although that is likely to happen with much more public awareness and communication.

  3. Sluggeaux

    Morgensen’s closing paragraph bears repeating here:

    Prosecutors have failed to hold financial firms accountable in recent years, stoking a perception that the system is rigged in favor of big and powerful entities that generate immense wealth for their executives. That pension fund officials are also failing only confirms that view.

    The rise of the Democrats in the state that has been the bastion of reactionaries such as Richard Nixon, Ronald Reagan, and Arnold Schwarzenegger has been funded by their close ties to political funding from the Private Equity (oh, let’s call it Leveraged Buy-Out) industry. The Sacramento Bee reported that the former CalPERS Board Member “placement agent” who funneled kick-backs to CalPERS’s now-imprisoned former CEO, was acting on behalf of Apollo. As reported here, Apollo was absolved of wrongdoing by the L.A. law firm retained by CalPERS, but the $63 million in fees paid to the “placement agent” have never been found in the wake of his bankruptcy and suicide after spending weeks holed-up in the Silver Legacy casino in Reno, NV.

    Kudos to Gretchen Morgensen and Yves Smith for exposing this skullduggery. With the exception of McClatchy’s Bee, the press in California are too weak and oligarch-controlled to report the story of how much political funding is being funneled to the current generation of lighter-than-air California Democratic politicians by these Leveraged Buy-Out confidence schemers.

  4. Jim Haygood

    Fidelity’s founding Johnson family owns both a private venture capital fund and a public brokerage. That’s a problem, says Reuters:

    In at least one lucrative field, however, the Johnson family’s interests come first. A private venture capital arm run on behalf of the Johnsons, F-Prime Capital Partners, competes directly with the stable of Fidelity mutual funds in which the public invests. It’s an arrangement that securities lawyers say poses an unusual conflict of interest.

    Fidelity mutual funds became one of the largest investors in six bioscience and tech companies backed by F-Prime Capital after the start-ups became publicly traded. Legal and academic experts said that major investments by Fidelity mutual funds – with their market-moving buying power – could be seen as propping up the values of the Johnsons’ venture holdings.

    Key compliance executives have held dual roles overseeing investments by Fidelity and F-Prime Capital. For three years until September, the chief compliance officer for Fidelity mutual funds, Linda Wondrack, also served as chief compliance officer for Impresa Management LLC, the advisory firm that manages the investments of F-Prime Capital.

    As the Fidelity tagline goes … Feel the johnson!

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