Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers.
Bowden heads the SEC’s examinations unit, and his rap sheet was based on his two years of experience in auditing private equity firms. As bad as embezzlement and other sharp practices are, at least as troubling is the revelation that the limited partners have been derelict in their duties. They’ve agreed to terms in their relationship with the general partners to make it easy for the general partners to abuse the investors. The general partners can steal from their limited partners because the limited partners are asleep. The LPs have failed to negotiate for contractual protections when they have the most leverage, prior to investing, and they’ve been unwilling or unable to monitor their investments effectively once they’ve handed over their money. Note that the industry was warned about this possible outcome; it corresponds to the worst scenario, ” A Broken Industry,” in a 2011 paper by Harvard Business School professor Josh Lerner.
– From the post: SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior
One of the most pernicious financial schemes of the post crisis era relates to a practice most Americans are entirely in the dark about, but may end up harming retirement plans down the line. I refer to the pervasive, incestuous and shady relationship between public pension fund managers, politicians and alternative asset firms (hedge funds and private equity).
Indeed, in the “new normal” of rigged financial markets, much of the investment industry no longer cares all that much about performance. The name of the game is to simply collect as massive an asset under management pile as possible and earn tremendous wealth by collecting fees risk-free. The enormous amount of “dumb money” residing at public pension funds provides the perfect mark, and pension managers as well as corrupt politicians and their appointed bureaucrats appear more than willing to comply.
David Sirota, investigative journalist at the International Business Times, has been one of the leading figures in exposing such schemes, and his latest piece, Wall Street Fine Print: Retirees Want FBI Probe Of Pension Investment Deals, is extremely important. Here are a few excerpts:
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In North Carolina, managing the retirement savings of teachers, police officers, firefighters and other public employees is big business. As the sole fiduciary of the state’s $90 billion pension fund, Treasurer Cowell, a Democrat, was recently named the world’s 18th most important institutional investor by the Sovereign Wealth Fund Institute. The State Employees Association of North Carolina (Seanc) estimates that North Carolina is on track to spend a billion dollars a year of retirees’ pension money on fees to private financial firms. Roughly half of all North Carolina pension deals involve placement agents, and Seanc estimates that has generated roughly $180 million in placement agent fees — costs that are effectively paid by the pension fund, according to critics.
David Sirota must be commended for his incredible work this year exposing the insidious relationship between public pension funds and “alternative asset managers,” namely private equity firms and hedge funds. It is the private equity component that has captured my attention the most due to the industry’s notoriously opaque and seemingly illegal fees.