SEC to step up scrutiny of private equity firms

@CNNMoneyInvest January 27, 2012: 12:09 PM ET
SEC

The SEC has brought roughly a dozen cases against private equity firms to trial since 2000.

NEW YORK (CNNMoney) -- The private equity world is struggling to stay in the shadows.

It's harder to do so with Republican presidential contender Mitt Romney getting criticized for his private equity roots. If that weren't enough, the Securities and Exchange Commission says it plans to step up scrutiny of the industry as well.

Since 2000, the SEC has brought only a dozen cases to trial against private equity firms compared to 50 cases against hedge funds just in 2011, according to the agency.

Expect that to change, said Robert Kaplan, co-head of the asset management division in the SEC's Division of Enforcement.

"We get increasingly concerned when we see the size of the allocations of pension assets to alternative asset classes, including private equity," said Kaplan.

Because of the nature of the cases, Kaplan cannot specify how many investigations into private equity are ongoing, only noting that there are "more." The agency chooses to bring only some of the investigations to court.

The shrinking private equity world

Among the areas of focus: what private equity firms tell potential investors about how they value portfolio companies; insider trading or giving owners or family members of private equity firms special access to buying shares of a company once they have insider knowledge; and excessive fees for investors.

Over the past several years, the SEC has won several high profile cases against hedge funds. Last week, the agency announced a $9 million settlement with the hedge fund Diamondback Capital for insider trading violations.

Last year, the SEC's investigations into the hedge fund industry helped indict ex-Goldman Sachs (GS, Fortune 500) and Procter & Gamble (PG, Fortune 500) director Rajat Gupta on insider trading charges. Gupta's indictment is part of a broader investigation into hedge fund founder Raj Rajaratnam, who the SEC said illegally received insider information about Goldman Sachs and Procter & Gamble from Gupta.

Top officials in the SEC's asset management divisions admit that private equity has largely escaped the regulator's attention because they had few professionals with a deep understanding of how buyout firms work.

In 2010, during a restructuring of the SEC's investment policing division, the agency assigned 65 individuals to the asset management unit to focus on investigations of hedge funds, mutual funds, and private equity funds.

Since then the agency has worked to bring Wall Street insiders onto its team. Among the private equity industry new recruits: Igor Rozenblit, who previously managed North American private equity funds for Credit Agricole.

The asset management unit has also been increasing its use of quantitative models to get leads for potential investigations. Outsize returns are one reason the agency might look deeper into a fund. "The analytics have been a good source of investigations," said Kaplan.

Meanwhile, Congress' Wall Street reform legislation, the Dodd-Frank law, will force private equity firms to disclose more information about their investments and outside advisors later this year. Kaplan said such disclosure will help the SEC do its work more easily. To top of page

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