Before you get too excited, our SEC whistleblower filing is a minimalist version of the genre, but we thought it would be instructive to readers nevertheless.
We came across what looks like a slam-dunk securities law violation by sheer happenstance. When we were reading Eileen Appelbaum and Rosemary Batt’s important book, Private Equity at Work, we noticed an in-passing reference to Riverside Partners as an example of a private equity firm whose strategy emphasized making operating improvements in the companies it purchased. As Appelbaum and Batt pointed out, for smaller and mid-sized deals (up to roughly $350 million in transaction value), private equity firms can make a case that they have make a bona fide economic contribution, since companies in that size range that have growth potential often need to professionalize their operations or reach new markets. In theory, the private equity firm can help them fill those gaps via helping provide the needed systems and personnel, or via acquisitions or mergers (note that firms that target bigger deals often make similar claims, but Appelbaum and Batt found their returns depended largely on cost cutting and financial engineering).
On a whim, we decided to look at Riverside’s Form ADV. Investment advisers are required to make this filing as part of their registration process with the SEC and state securities regulators. Part 2 of the filing is a narrative, written in plain English, in which the adviser describes its fee schedule, conflicts of interest, whether it has been the subject of disciplinary action, and other important information. Investment advisers must provide their investors at least annually with an update of material changes to the brochure and deliver or offer to deliver an updated brochure to the client. The SEC’s site provides a link to the most current version of the Form ADV.
As you’ll see in the document we included with our online whistleblower filing, embedded at the end of this post, Riverside’s filing contained the remarkable admission that they were charging “costs” to investors that were not permitted by the limited partnership agreement in their 2014 Form ADV. As we contend, that isn’t in typical grey area of ambiguity that private equity firms like to exploit; it’s a straight-up admission of misconduct.
What is even more troubling is that even though the SEC has been giving warnings about all of the sharp practices it has been finding in private equity, Riverside has a virtually identical admission in its 2015 Form ADV, which was filed at the end of March. That means that Riverside hasn’t halted or changed the practices that it admits are not authorized in its contracts with investors.*
The fact that Riverside hasn’t stopped making impermissible charges, which we view as tantamount to embezzlement, speaks volumes about what it apparently thinks about the vigilance of the SEC and its investors. One has to assume that Riverside’s limited partners either didn’t look at the Form ADV filing at all or gave it such a cursory look that they missed the admission. That is damning in light of Andrew Bowden’s speech last May warning of widespread abuses in how private equity firms charge fees and expenses. The Riverside text at issue is in a section of the Form ADV called “Fees”; you’d think it would have been a must-review item for limited partners after the Bowden speech. This demonstrates how lax investors have been in taking steps to remedy abuses by private equity general partners, even when they have unambiguous evidence of malfeasance.
Needless to say, Riverside’s refusal to stop taking more than it is entitled to take also indicates it isn’t worried about the SEC taking action against them either.
We would also like to point out to the SEC that they seem to have a weird glitch in their online whistleblower submission process. The online questionnaire runs to only a few pages and allows whistleblowers to choose to file anonymously, to submit via an attorney, and also to tell the SEC what might tip the target off about who was making the complaint, if retaliation is a concern. That is all well and good. As part of the questionnaire, the whistleblower tells the SEC who he is, the usual basic stuff like name and contact information. When you try submitting that page, you get into a loop where the site apparently has the completed profile (it shows your name and whistleblower status and the ability to edit your information) but if you try going to the next page, the declaration page, it tells you that you need to create a profile. I got this error on a Mac and a colleague on a PC had similar problems, in that he also found the site asked him to submit a profile after he had already completed that page. We both found that resubmitting the page worked, but it was nevertheless frustrating and concern-making.
Since I am a Form ADV novice, but have looked at a few limited partnership agreements, in which the general partners go to considerable lengths to give themselves wriggle room for questionable practice, I’d hazard that admissions like those of Riverside are unusual. But the fact that there is even one instance of a decent-sized, established firm that it is open about its sharp practices, strongly suggests that Riverside is confident that nothing much will come of the SEC’s efforts to crack down on the industry. And given the way that Andrew Bowden walked back his stern words over the course of the summer and fall, it appears that Riverside’s conclusion is well founded.
____
* Note that even if Riverside had decided to stop its apparently verboten conduct after the SEC made clear it took a dim view of it, that would not remedy its past violations.
RiversideTCR-final
RiversideTCR final
28 comments
Comments are closed.
HA HA this is just so funny. The SEC is the lamest institution on earth and any bone in there at all is 100% remote controlled by Jamie and Loyd.
I’m confused. Why would Riverside Partners make such a bold admission? If they left it out, who would’ve had the inclination, access, skills and motivation to dig up such obscure transgressions?
They don’t see it as a violation, aren’t aware they made the admission or get off on declaring criminality. I suspect number three as finance attracts a lot of sociopaths.
finance attracts a lot of sociopaths
Troo dat. I know from personal experience (and am sworn to confidentiality).
Good luck with your filing. and thanks for all the good work the Naked Capitalism team does. And to think, it was an NCB mortgage securitization that brought me to this fountain of information…and I have drunk deeply since.
This demonstrates how lax investors have been in taking steps to remedy abuses by private equity general partners, even when they have unambiguous evidence of malfeasance.
The “investors” or Limited Partners have repeatedly been shown to avert their eyes, keep their head down and stay silent, lest Pirate Equity slit their financial throat. Why is that? The Limited Partners are just smaller Pirates, and play the Pirate Equity game with money pirated from the wage slaves in the galley, so if Pirate Equity firm Riverside steals an extra barrel of rum, the Limited Partners look on in silence and admiration at the thievery.
I worked for a Riverside owned company. For the investors it was a blast, in 3 years a 4x return on capital, for the employees it was hell. We got a new CEO who did some good things and some horrendous things but mostly we got longer hours, layoffs, less pay and benefits and complete loss of autonomy. The interesting thing is that the company who purchased us got absolutely slammed, with all the stress that Riverside had put in to the system to pump up the numbers the company pretty much disintegrated in the 12 months after the Riverside exit. Among the more egregious actions was the introduction of a 7 percent “corporate contribution” that was to be paid to Riverside on a monthly basis, for a company that was working a 10 percent margin this dented the numbers, we were then told to maintain and improve our profitability.
We did not get anything for our 7 percent corporate fee, we did get larded up with debt that had to be serviced as we went on a mini acquisition spree.
I’m glad to see you jump on this Yves, but there are a couple of mistakes in the text that, to me, are both jarring and distracting, as they indicate a carelessness in proofreading.
From the sixth line of page 1 of the document:
“have made clear it clear that that they”
And from the eighth line of page 2:
“The understanding or the limited partners”
I see mistakes like these frequently in blog posts and comments where the impact and credibility of the author are not really affected. However, in a document as important as this, it seems to me, such carelessness impairs your credibility and detracts from the power and impact of the writing. It also interrupts the flow of reading comprehension since the reader has to stop to figure out what the correct word is or what words should have been left out.
(There my be other proofing errors like these, but I stopped reading in the middle of the second page because I felt that I understood the gist of the document.)
*Sigh* I simply cannot see typos and yes, this is not good, I did read through the text three times and caught some. But even ECONNED still has typos in it, in its second edition, even after having had three separate professional proofreaders read the texts in full as well as Richard Smith and me, both of us more than once.
Lord, I hear you. I am also a writer, and I now how devilishly hard it is to catch all the typos. Generally, you do a fine jib…
Yes, I agree, you usually do a fine jib. :)
Have you ever tried proofreading by starting at the end and working forward? You don’t get caught up in the meaning of the text, but only see the words as individual words.
Which, on second thought, is useful for catching spelling errors only.
Sic em. While chasing yield is understandable, when PE barely beats index funds or other simple investment strategies while generally harming labor in the communities it invests in, it makes no sense whatsoever for pension funds to invest their money in PE. Even if they do beat index funds and the like, the damage to labor remains and for worker savings to be used to dis-employ labor is patently insane. Rather than maximizing returns, pension funds should aim for decent returns in investing in enterprises that grow, rather than harm, labor.
sigh….fully loaded employee costs can be taken to mean any number, any time, and charged away, I could turn a minimum wage slave into a $100/hour employee easily, imagine what I can do with $500/hour “consultants”.
PE is always better than ANY index fund, because there is almost no downside risk involved. If the investment sours, one can simply fire folks, sell their desks and chairs and divvy out the cash. Happens all the time – creative destruction, its called.
Not a lawyer, but the more interesting issue could be if a PE firm, and speaking a hypothetical here, and their “sophisticated” investors, who sign off as having read and understood all the fine print etc and are now on notice of potential bamboozling and cahoots going on, are also on the hook for fines as co-conspirators? Kinda tough to say you’re a sophisticated investor who doesnt/cant read docs, but still send 7 or 8 figure checks off. If even a 1% chance, that’s some pretty darn deep pockets to wrestle cash out of.
I think you have a gold mine here – congrats!
Bedazzled,
The issue is that the “costs” charged were admitted to be in violation of all the fine print of the contracts. All the lawyering and care in the world won’t protect you from that. But there is a fail here in that having admitted to the conduct in the Form ADV, no investor appears to be doing anything about it, witness that Riverside says in its 2015 Form ADV that it’s still making these verboten charges. In the SEC’s defense, by contrast, they haven’t done in depth audits of that much of the industry so far and may not have gotten around to Riverside.
If the investment sours, one can simply fire folks, sell their desks and chairs and divvy out the cash. Happens all the time – creative destruction, its called.
Pirate Equity flying the skull and crossbones on the Creative Destruction
You’re not the only one frustrated by the SEC’s Whistleblower process. Consider this recent article:
“SEC Whistleblower Program Is A Black Hole Of Despair” (BrokeAndBroker.com, April 9, 2015)
This might be just the spark. It’s a template for any citizen to write up some similar PE misconduct. It’s the basic legal argument in a two page letter.
That’s great, Yves. Individuals have to engage in doing the job of regulators and the (in)Justice Department. I hope we see more of such actions. Bravo!
I nominate Yves Smith for USAG.
From my personal observations over 60-plus years, and readings in history and “current events,” and those life experiences we all have some of, it seems inarguable that corruption and thievery are inevitable.
There’s a very recent development, in the literature and the grand sweep of “the science of economics,” that is finally getting around to discussing the nature and elements of corruption, and the effects of that behavior on the “political economy.” It even seems there are models out there, and of course a huge reservoir of primers and prototypes for those wanting to partake in the looting. My sense is that up to a point, and sadly so, most people grind their teeth a little at being extorted or defrauded. Some, of course, are paying a much higher price, up to and including everything they have actually built, their entire security and comfort in this world, including their lives — “Life, liberty, property (and the purfuit of happineff)”, out the window. It appears that “economists” have only gotten around to a “rigorous study” of corruption as “an element of the economy” since the early 1980s, a fascinating observation, since from the start of civilization, whole nations, both North and South, let alone cities and states and sad little impotent polities in places like, inter alia, Ferguson, MO and Baltimore, have been bled nearly dry, their potential to exist as places of comity and decency and meta-stability destroyed, by that “element of the economy.” In the current context, with a nod to “getting Ukrained” and derivatives and “black budgets” and opaque “campaign contributions,” et cetera, a little doggerel from a 17th century observer:
Blest paper credit! last and best supply
That lends corruption lighter wings to fly!
Gold imp’d by thee can compass hardest things,
Can pocket states, can fetch or carry kings;
A single leaf shall waft an army oe’r,
Or ship of senates to some distant shore;
A leaf, like Sybill’s, scatter to and fro
Our fates and fortunes, as the wind shall blow:
Pregnant with trillions flits the scrap unseen,
and silent sells a king, or buys a queen.
Alexander Pope
This next bit is straight from Wiki, under “Economics of Corruption:”
Economics of corruption applies economic tools to the analysis of corruption. Rigorous study of corruption by economists commenced in the 1980s.
History of the discipline
In 1968, Nobel laureate economist Gunnar Myrdal found corruption ‘almost a taboo (among economists) as research topic’. Indeed it has mostly been a matter of political science and sociology. [And in ever smaller ways, of criminology and criminal law and criminal procedure.] However, the scenario changed since the 1970s. Since Rose-Ackerman’s article “The Economics of Corruption”, published in the Journal of Public Economics in 1975,[1] more than 3,000 articles have been written with ‘corruption’ in the title, at least 500 of which directly focus on different aspects relating to corruption using an economic framework.[2] Some books have also been published on the subject.[3]
Organizations have emerged to deal with the economics of corruption.[4] Some universities offer courses under the title Economics of Corruption.[5] Nobel laureate economist Gary Becker and an American Judge Richard Posner have opened a blog for open public discussion discussing economics of corruption.
Books on economics of corruption
Some books have been produced with the specific title of “economics of corruption”. One of these is The Economics of Corruption edited by Ajit Mishra published by the Oxford University Press in 2005. This book is an anthology of 11 essays under 4 categories, written by 16 economists. The titles of the essays give an idea of the various approaches taken by different economists. They are quoted below :
Corruption : an Overview
Corruption : Its causes and Effects
Hierarchies and Bureaucracies: On the role of Collusion in Organizations
A Theory of Misgovernance
Pervasive Shortages under Socialism
Corruption and Growth
Corruptible Law Enforcers : How should they be compensated?
Notes on bribery and control of corruption
The Choice between Market failures and corruption
Rents, Competition and corruption
Electoral competition and Special Interest Politics
One can observe that the essays do not capture corruption in all its economic essence. Hundreds of essays have been published during the last two decades that deal with many more aspects of corruption from an economic perspective. Some other books are :
Rose-Ackerman, S. : Corruption – A study in Political Economy, 1978, Academic Press, New York.
Ekpo, M. U. (ed.) : Bureaucratic corruption in sub-Saharan Africa, 1979, University Press of America, Washington.
Noonan, J. T. Bribes, 1984, Macmillan, New York.
Chowdhury, F. L. Corrupt Bureaucracy and Privatization of Tax Enforcement, 2006, Pathak Samabesh, Dhaka. http://en.wikipedia.org/wiki/Economics_of_corruption
One wonders if the books and essays do more than characterize and describe how corruption is done, or if there’s prescriptions on how to fix (bad choice of verbs, I know) the problem and “make it go away.” I thought, similarly, that from the syllabus, my law school class on Land Use And Planning was going to be about how to plan and protect communities; actually, it was, quite cynically, about how to use up-zoning to steal farmland , how to avoid impact fees, “how to get eminent domain to work for YOU,” tax breaks for “developing” an area, and the other scams. It was taught by a “successful developer” who was happy to give insights on how to suborn the zoning board and commissioners with minimum tracks and visibility. Knowing how it works, how it happens is, for a doctor the key to figuring out how to cure the illness — and patently not so, for Homo Economicus.
My impression is that a certain amount of “cheerful corruption” is maybe even necessary to allow the mechanics of political economy to operate. Tipping is a kind of corruption, that most folks cheerfully participate in as a fair form of compensation. Back in Chicago, which is hardly unique, if you want to have your “Torrens” title certificate (a unique substitute for the traditional deed to real property) recorded in a timely manner, you have to “shake hands” with the counter person. That involves holding a folded-small $20 or $50 bill between the inner joints of your right ring and middle fingers, so the counter person can easily prestidigitate it into his own palm, “and no one is the wiser.” Want a boat slip in a Chicago marina? Go “shake hands” with the Harbor Boss, a position from which so many of the incumbents, for generations, have taken a short detour through the prison system, albeit they still come out richer. Sticking with Illinois, that tradition of jail-time-after-a-little-time-in-office applies to most Illinois governors too, skulkers like Rod Blagojevich, and to a former Illinois Secretary of State, Paul Powell, who decreed that checks for license applications and incorporations be made out to him, personally — “Pay to the order of Paul Powell,” full stop. When he died, filthy rich, big moving boxes of un-cashed checks payable to him, personally, that were supposed to cover the fees for performance of the ministerial functions of the cabinet agency he ruled over, were found in his closets.
While I’m nattering, I’m reminded of a conversation held in Vietnam between a French-speaking South Vietnamese bar owner and an earnest, well-intentioned volunteered-to-serve-American GI. The GI was all about how we were bringing democracy to Vietnam. Democracy basically meant frequent popular elections, in place of other modes of selecting and installing rulers, the bar owner pointed out. He noted that colloquial Vietnamese had two adjectives, translating roughly “empty” and “full.” He explained the reality: that a new officeholder comes in as an “empty” politician or official, whose greed knows no bounds since there are so many debts and obligations incurred to gain the position. After a while, after the second or third villa has been acquired, the fancy cars and females, other pleasures served and all that, and the chain of people who live off and help manage the transactions have also been satiated, the incumbent becomes “full,” and the mordidas and baksheesh fall off to a tolerable quantum. Apparently, in at least some less “civilized” polities, many corrupters recognize the ‘kill the goose that lays the golden eggs’ principle. Not any part of our late-Imperial kleptocracy, more’s the pity. But the bar owner asked, rhetorically, “Tell me again why we should want to take a chance, every two years, on having an ’empty’ politician replace one we have ‘filled’ already?”
But there has to be a smidgen of hope left out there, in what otherwise would be an engulfing sea of futility, to keep the mopes and muppets on task, filling up the reservoirs of value and wealth with the products of real labor and the Real Economy. Hence the occasional little bit of “enforcement” of rules and laws, to give a tiny bit of substance to the notion of “rights” protected by “rule of law.” Too many of us would happily blow past an internal sense of ethical and moral constraint that seems to subsist in most of us to varying degrees, and grab with both hands too, given half a chance.
A maxim from law school, as it once was, is stated as “there is no right without a remedy.” That preachment is usually given in the context of contract law, where the parties are expected mostly to have their own muscle to rely on for establishing “rights,” and thus to have “remedies.” (Sounds like the crap that Libertarians preach, no? Though they assume that perfect quantum of “government” that hands down and enforces the rules that create the rights, and beats up on John Galts who cross the line into unbridled abuse.) But it applies to securities law, and to places like Baltimore, and Detroit, and Ferguson and all the other small towns and county governments that are parasites on the “less-advantaged” people who live there. And with the growing exceptions of marriage equality and the “right to die” and the end of Prohibition on marijuana, to Constitutional “law” too.
My postulate is that there has to be a tolerable quantum of “slack” in any system for it to survive without damage or destruction. Whether it’s the clearances and tolerances in, e.g., your BMW’s V-8 and transmission that let lubricants get to the parts that would otherwise burn up or explode from friction, or the cop who lets the school kid who’s playing hooky or out after curfew off with a warning and a call to the parents, pick your own necessary examples among a plethora of others. By the same token, if the oil pressure regulator on that V-8 screws up so that all the oil blows out past the seals? “That’s a pretty piece of precisely machined junk you got there, mister…”
Alexander Pope!
And for a little fun reading, look here (and a few pages up and down in the linked document, the 1824 edition of Encyclopedia Britannica,) for a peek into the thinking that has got us to where we are today:
https://books.google.com/books?id=nWEIAAAAQAAJ&pg=PA227&lpg=PA227&dq=paper+credit+corruption+lighter+wings&source=bl&ots=nkOuIHIejk&sig=BPcHGdhPf12wiYxXTMHYu4dvbNk&hl=en&sa=X&ei=sGRCVc6QLIO_ggT31YNY&ved=0CEEQ6AEwCA#v=onepage&q=paper%20credit%20corruption%20lighter%20wings&f=false
You got me curious, Yves, so I looked up Riverside Partners’ recent funds on PitchBook.
Riverside Partners III, their 2006 fund boasted such elite limited partners as the Kauffman Foundation, the Ford Foundation, MIT Investment Management, and Yale University Endowment. Only 1 corporate pension fund and no union pension funds or public employee pension funds. PitchBook failed to provide recent performance data for this fund.
The Kauffman Foundation and Yale University Endowment re-upped for the 2009 Riverside Partners IV Fund. But most of the other LPs did not. Riverside recruited 6 public pension funds, including CalPERS and the Illinois State Board of Investment plus 2 corporate pension funds and 1 union pension fund as LPs for this fund. Nine out of the 15 LPs are pension funds. According to PitchBook, Riverside Partners IV is not performing very well. It is below the median for funds of its type, placing in the third quartile.
With that record of performance, recruiting LPs for the most recent 2012 fund must have taken some ingenuity on Riverside’s part. Kauffman, Ford, Yale and MIT as well as CalPERS did not invest in Riverside Partners latest fund. Instead we see that of the 16 LPs that invested in Riverside Partners V Fund, five are public employee pension funds, seven are union pension funds, and one is a corporate pension fund. That’s 13 out of 16 LPs that are pension funds! They include the Illinois State Board of Investments which re-upped despite its poor experience in the previous fund. They also include the Machinists and a raft of smaller pension funds – Arkansas Teachers, Houston Police, New England Carpenters, Ohio Carpenters, New York State Teamsters and others. Riverside Partners V fund is losing money according to PitchBook and is in the very bottom quartile of funds in its class.
Riverside Partners must be concerned that there will be little to no carried interest for them coming from Riverside Partners IV and V. Perhaps this explains the misallocation of expenses to their limited partners.
This is extremely helpful, thanks!
BTW I did look at CalPERS and didn’t see any Riverside funds listed among their current investments. Given as you know well that 2006 funds have had trouble exiting their investments, the odds are decent that that fund has not yet wound up. If so that would mean CalPERS sold its stake, another “not good” sign.
tl;dr: “If loving fees is wrong, I don’t want to be right” [hums]. So awesome. Twice, too!
Times like these it would be interesting having an asshole for DA who will break balls until someone squeals. Say what you will about Giuliani the politician, as DA the guy did some damage…
As an interested lay onlooker, I’m particularly interested in Appelbaum’s comment. I live in Champaign, IL, the state governed by PE near-billionaire Rauner. As a U of Illinois employee, I’m of course interested in the beleaguered state pension’s investment in the Rauner PE group GTCR. The other connection is Kauffmann, who advised the university on its privatization efforts and business model (http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2013/08/kci_uiuc.pdf). It’s CEO spoke out the graduation in 2009 about “entrepreneurship.” I wouldn’t be surprised if the U of I endowment also greases the wheels. Such densely intertwined corruption.