KKR Fined $30M for Breach of Fiduciary Duty

KKR has agreed to pay nearly $30 million to settle charges that it had unfairly charged institutional investors fees for unsuccessful buyout bids, and thus allegedly breached its fiduciary duty.

According to the US Securities and Exchange Commission (SEC), the private equity giant had moved more than $17 million of “broken-deal” expenses to its flagship funds over a six-year period ending in 2011.

“Although KKR raised billions of dollars of deal capital from co-investors, it unfairly required the funds to shoulder the cost for nearly all the expenses incurred to explore potential investment opportunities that were pursued but ultimately not completed,” said Andrew Ceresney, director of the SEC’s enforcement division.

“KKR’s failure to adopt policies and procedures governing broken deal expense allocation contributed to its breach of fiduciary duty.”Over the same period, KKR incurred $338 million in similar due diligence expenses for these unsuccessful buyouts, the SEC added.

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Furthermore, the regulators said KKR failed to allocate some of these fees to co-investors that included its own executives who “participated in the firm’s private equity transactions and benefited from the firm’s deal sourcing efforts.”

According to the SEC’s findings, the New York City-based firm also did not inform its investors of these expenses in limited partnership agreements or any related materials. And until 2011, KKR hadn’t implemented a written compliance policy detailing its fee allocation practices.

“KKR’s failure to adopt policies and procedures governing broken deal expense allocation contributed to its breach of fiduciary duty,” said Marshall Sprung, co-chief of the SEC’s enforcement division.

KKR neither admitted nor denied any of the SEC’s allegations.

Instead, its spokesperson said in a statement that the firm takes its fiduciary responsibilities seriously.

“KKR is firmly committed to upholding the highest governance and transparency standards, and we remain dedicated to continually enhancing our practices on behalf of our fund investors,” the spokesperson said.

Earlier this year, it was revealed KKR refunded about $8 million to pension plans in 2014 after the SEC found the firm had incorrectly allocated and failed to disclose certain fees.

“The SEC concluded that certain ‘strategy expenses’ including senior advisor fees, research fees, and broken deal expenses should have been allocated differently among investment vehicles,” KKR said in February.

CIO_Opinion_Liz_Story Art by Joel KimmelThis June I attended the annual Summer Exhibition at London’s Royal Academy of Arts. For more than 240 years, this institution has invited artists from all over the world to show their work—and entice collectors to buy it. Work is displayed with just a number, so in theory, gallery-goers have no idea of the artist who created it and must judge the piece on its own merit. In reality, of course, famous artists’ styles and themes are evident, so these are snapped up regardless of price and, in some cases, quality.

Last year I thought I would join the art-owning elite and paid a deposit for a lovely woodcut of some trees. I was told by gallery staff I had secured a bargain and I went home very proud of myself.

It was only after the artist had been in touch to discuss the cost of framing and delivery did I realise I had not appreciated the entire situation. The piece was 2.5 metres long and 1 metre high, which meant it had to be placed in a frame made of bespoke, laser-cut Perspex. It would also not fit in a car so I would have to hire a van to collect it from the framing shop. Once home, I would need special brackets on the wall before I could hang it, so the 20-kilogram artwork did not pull half of the house down.

To summarise: the artwork is still leaning against the bookcase in my living room and has already cost 50% more than the original price I paid for it.

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If I had known the drama and expense to get just this far in the process, I probably would not have bothered, despite still really liking the picture itself.

This is the theme running through this month’s issue: knowing what you’re getting yourself into. In our Strategy + Tactics section, we look at the side of investing that is often overlooked, yet pivotal, when considering bringing assets in-house: operations.

Our Interrogation subject is a pension-CIO-turned-asset-manager who, by way of his background, knows better than most what his clients need—and don’t. Our columnist, Ralph Frank, thinks he has come up with a way to measure at least some of what your outsourced-CIO or fiduciary manager is promising and delivering. Meanwhile, Assistant European Editor Nick Reeve goes (figuratively) around the globe to find out how deeply entrenched in a market your fund manager has to be to get the best returns.

Finally, our cover story looks at how investors are getting tangled in knots they didn’t even know existed in their investment contracts. We look at whose responsibility it is to spot and negotiate out of them—and why they are becoming increasingly common as investors are getting more sophisticated.

Knowing what you’re getting into is vital. If you don’t, you may end up with what you wanted, but for a lot more than you thought. Investors—like finance journalists—don’t have the cash to spare.