Jan. 19, 2021

Court Fines Former Apollo Partner $240K for Misallocating Personal Expenses; Places “Significant Blame” on Firm’s Internal Practices

A portfolio manager’s professional activities often include travel, gifts and entertainment expenses, but woe betide the manager who passes off personal expenses as business expenses. The SEC recently won a civil action against a former senior partner at Apollo Management, L.P. (Apollo) for falsely and repeatedly claiming personal expenses as business expenses, which were then billed to the funds he advised. Although the partner’s actions were unusually egregious in nature, the Findings of Fact and Conclusions of Law issued by the U.S. District Court for the Southern District of New York (Court) pointed out that Apollo’s policies and procedures deserved “significant blame” for the fraud. Less than two weeks after final judgment was entered against the partner, the SEC instituted public administrative proceedings against him. This article analyzes the judgment against the partner, including the deficiencies in Apollo’s policies and procedures that the Court identified as contributing to the misallocation to and payment by funds of the partner’s personal expenses. The article also contains key takeaways based on several Private Equity Law Report interviews about the matter, including the case’s significance and six important steps firms can take to avoid similar expense allocation violations in the future. See “Study Shows PE Managers Are Absorbing a Greater Portion of Expenses (Part One of Two)” (Mar. 19, 2019).

Techniques for Preserving Qualified Small Business Stock Benefits for Early‑Stage Investments (Part One of Two)

Entrepreneurs and investors – ranging from venture capital, PE, hedge funds or family offices – working with early-stage businesses have become increasingly familiar with the potential tax advantages of holding Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code of 1986. Although entrepreneurs and investors have become aware that qualifying investments in QSBS may reduce or eliminate federal income taxes on future exits from their investments, uncertainty remains about certain techniques for transforming existing investments into QSBS. In a two-part guest series, Neal Gerber Eisenberg attorneys Michael B. Gray, Jeffrey S. Shamberg and Eric M. McLimore detail the primary tenets and considerations for fund managers to obtain favorable tax treatment from holding QSBS. This first article discusses some techniques for converting certain existing businesses operated through non-qualifying “flow-though” or “pass-through” entities into qualified small businesses. The second article will address how fund investments, Simple Agreements for Future Equity and convertible instruments can receive and preserve QSBS status. For coverage of additional tax guidance, see “Current Tax Challenges for Funds With European Investments” (Sep. 29, 2020).

2021 PE Forecast: Potential Lasting Impact of the Pandemic on Fund Terms, Strategies and Compliance Practices (Part Two of Two)

The PE industry evolved over the course of 2020 to cope with the unexpected ramifications of the coronavirus pandemic and the market dislocation it caused. Some of those changes (e.g., the early dip in secondary transactions) are already beginning to fade and will dissipate further as the industry enters 2021. Others are likely to remain, however, such as the increased use of co‑investment programs and the SEC’s focus on managers’ operational proficiencies. Any sponsor that gets out ahead of those issues will be in the best position to ensure that this year will be better than the last. To assist sponsors with preparing for what to expect in 2021, the Private Equity Law report interviewed Schulte Roth & Zabel partners Stephanie R. Breslow and Marc E. Elovitz. This second article in a two-part series details specific fund terms and practices that are likely to persist in 2021, along with compliance practices sponsors need to adopt to endure heightened SEC scrutiny under the Biden administration. The first article forecasted the potential tone and focus of examinations by the SEC’s Division of Examinations – formerly the Office of Compliance Inspections and Enforcement, or OCIE – in the new year, as well as how potential rule changes could affect PE sponsors. For additional commentary from Schulte attorneys, see “How Fund Managers Can Prepare for SEC Remote Examinations During the Coronavirus Pandemic” (Sep. 1, 2020); and “What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements?” (Feb. 4, 2020).

State, Federal and International Tax Implications of the 2020 Elections and the Coronavirus on the Alternative Investment Industry

With the dawn of a new financial year, the potential state, federal and international tax implications of the coronavirus pandemic and the U.S. elections are at the forefront of fund managers’ minds. To address those issues, the New York Alternative Investment Roundtable (NY‑AIR) recently hosted a webinar that explored how the incoming Biden administration and the Democrats’ victory in the Georgia run-off elections could impact the alternative investment industry, along with the coronavirus-related tax changes to watch. The program was moderated by Kunjan Mehta, vice president of NY‑AIR and partner at Grant Thornton, and featured Scott A. Harty, partner at Alston & Bird, and Jonathan Traub, managing principal of the tax policy group at Deloitte. This article summarizes the key takeaways and insights from the discussion. For additional commentary from Alston & Bird attorneys, see “How PE Sponsors Can Avoid Being Targeted by the DOJ for Parental Liability Under the False Claims Act” (Dec. 15, 2020). For further insights from Deloitte, see “How the Proposed Carried Interest Regulations Affect Fund Managers” (Nov. 10, 2020).

SEC Annual Report Highlights Pandemic Response, Enforcement Focus Areas and Whistleblower Program Success

The SEC’s Division of Enforcement (Division) has released its fourth Annual Report (Report). The Report covers the SEC’s 2020 fiscal year (FY 2020). It discusses the Division’s response to the coronavirus pandemic; its efforts to streamline operations; and the continuing success of the SEC’s whistleblower program. The Report also provides an overview of the Division’s 715 enforcement proceedings in FY 2020, which yielded $4.68 billion in total monetary relief and $602 million in anticipated payments to affected investors. This article discusses the key takeaways from the Report and the accompanying message from Stephanie Avakian, then‑Director of the Division. For coverage of previous Division’s first three reports, see 2017 Report, 2018 Report and 2019 Report.

Reed Smith Welcomes Fund Formation Lawyer Shervin Shameli in London

Fund formation lawyer Shervin Shameli has become a partner in Reed Smith’s private funds formation group in London. His practice includes advising fund managers on all aspects of establishing, structuring and operating private investment funds, as well as counseling institutional investors on their primary, secondary and co‑investment activities. For additional commentary from Shameli, see “Emerging From Abraaj’s Shadow: Current Status of Litigation and Responses From LPs and Regulators (Part One of Two)” (Jul. 21, 2020); and “How Fund Managers Can Design an ESG Investing Policy (Part Two of Two)” (Nov. 17, 2016).