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“Maybe there should be some more defendants in this case,” Judge Kevin Castel wondered aloud during a 2020 federal trial he was overseeing. There was, however, only one person being tried: Mohammed Ali Rashid, a former senior partner at Apollo Global Management.
Rashid had been accused of violating his duties to investors in Apollo private equity funds in the early 2010s by billing the funds hundreds of thousands of dollars in improper personal expenses, such as a trip to the Super Bowl and a friend’s bachelor party.
But the 2020 trial had exposed something else the court found interesting. It concluded that Apollo’s limited partnership agreements, with pensions and sovereign wealth groups, stated that such travel and dining expenses should be borne by Apollo, not the funds and its investors.
However, Castel, based on the evidence presented, said that Apollo had instead been mistakenly and systematically charging expenses to the underlying funds, reducing their net returns and increasing Apollo’s cut of overall profits. Rashid went on to argue that there was no reasonable way for him to know that his inappropriate expenses were ultimately making victims of Apollo’s limited partners. On that premise, he argued that he could not be held responsible on the charge of cheating the funds.
In his ruling, Castel said that Apollo’s accounting department “deserve[d] significant blame” for the harm done to fund investors but still ruled that Rashid had violated US securities law on investment advisers.
In 2024, Apollo’s practices are back under a microscope. An appeals court this month reversed Castel’s decision and upended his reasoning. The higher court’s ruling agreed with Rashid that the private equity firm’s expense system was broken enough at the time that Rashid himself could not have reasonably anticipated that the victims of his illicit spending spree were Apollo’s limited partners.
The appeals court wrote: “Apollo’s accounts receivable department contravened the terms of the fund partnership agreements — negligently or otherwise — and billed the funds directly for such administrative expenses.”
The evidence cited by the appeals court included testimony by one current and one former Apollo chief financial officer, as well as a high-level investor, that they believed Apollo, not the funds, was to bear travel and personal charges.
Apollo has previously settled charges with the Securities and Exchange Commission that it failed to properly monitor Rashid. But it has not faced action from the SEC or any other apparent challenge about what a district court judge and three appeals court judges have explicitly stated in written opinions: that Apollo was, institutionally, sending expenses to its funds that they managed rather than retaining those expenses at the management company.
The Financial Times last week asked Apollo about its billing practices after the appeals court ruling. Apollo told the FT: “The appellate court’s decision focused on a legal technicality that had nothing to do with Apollo . . . Apollo’s accounts receivable department never knowingly, or as a matter of practice, improperly billed any Apollo-managed funds for expenses that should have been accounted for as management company expenses.”
For the avoidance of doubt, Apollo now explicitly rejects the findings of two federal courts. It previously told the FT that “Apollo voluntarily remedied any erroneous billing resulting from the former employee’s fraudulent expense practices by making appropriate reimbursements to the funds and portfolio companies at issue”.
As the FT reported in 2020, Apollo’s outside law firm, Paul, Weiss, conducted an investigation about the firm’s expense practices. It found, adding to the confusion, that Apollo had borne $370k worth of personal expenses that should have been allocated to funds.
According to Apollo’s own public disclosures, over its 44-year history its private equity funds have earned an impressive gross 39 per cent return, annualised. On a net basis after fees, that falls to 24 per cent, annualised. The divergence shows just how much difference fees and costs can make to returns. And sometime expenses are added on top of recurring fees, as in the Apollo case.
The classic principal and agent relationship — where an investor outsources management of their assets to an outside party — is rife with potential conflicts of interest. One thing that should be clear is who pays for what. But the Apollo case shows that in private equity, monitoring and enforcing contract terms is not so straightforward.