Today the Blackstone Group agreed to pay $39 million to settle a Securities and Exchange Commission case charging that it ripped off investors over "monitoring fees"; $29 million of the settlement will go to the investors. It is a strange case: When you read in the SEC order about what Blackstone did, it does sound a bit like a rip-off, albeit a common one. But then when you read about what Blackstone disclosed -- basically, everything -- it is harder to figure out why the SEC is involved.
The Blackstone-advised private equity funds would buy companies, and then Blackstone would charge those companies "an annual fee in exchange for rendering certain consulting and advisory services to the portfolio company concerning its financial and business affairs." That monitoring fee would be paid to Blackstone (the company, i.e. in large part its managers and employees) rather than to the fund (i.e. to Blackstone's investors), though in effect half of it would go to the investors in the form of reduced management fees. So the fee created a conflict of interest: Every dollar paid to Blackstone would reduce the value of the portfolio company by a dollar, but would increase Blackstone's own revenue by about 50 cents.
