SEC Investigating Private Equity, Sovereign Fund Relationships

(January 15, 2011) – Citigroup and Blackstone are just two of up to 10 firms that are being investigated by the Securities and Exchange Commission for their dealings with sovereign wealth funds.

According to the Wall Street Journal, the financial institutions received a letter of inquiry from the regulatory body in recent weeks. While the letter did not contain specific allegations of bribery, the Journal states that they “appear to be tied” to a broader look into the financial industry’s potential bribes of foreign officials and employees of state-owned companies, such as sovereign funds. Because they are technically government officials, any bribery of sovereign fund employees would fall under America’s Foreign Corrupt Practices Act.

In recent years, sovereign funds have been heavy investors in Western banks and private equity firms as they seek to diversify their portfolios geographically, access higher returns – and potentially curry favor with Western governments. The investigation is believed to be in its early stages.

While the specific allegations have yet to be made public, any bribery investigation into public capital pools such as sovereign funds is likely to draw comparison to the now-infamous placement agent and corruption scandal seen in the past two years within the American public pension sphere. In states such as New Mexico, California, and New York, officials from pension funds and private equity groups have been charged with, and convicted of, allocating and receiving pension capital via illegal side-payments. Most notably, private equity kingpin Steven Rattner recently settled numerous charges that he illicitly gained access to New York state’s pension system for his then-firm Quadrangle; former State Comptroller Alan Hevesi, along with numerous associates, lost their jobs and/or went to jail for receiving illegal payments and allocating state capital because of it.