Don't Ask, Don't Tell: SEC Kowtow's to Blackstone's Refusal to Disclose

MARCH 31, 2009

According to Bloomberg, Blackstone and Fortress have different opinions about how much information they need to disclose to the SEC. The specific issue in question relates to the disclosure of the performance of their respective hedge funds.

Blackstone (the world's largest private equity firm) told the SEC, in not so many words, that they did not feel
they fell they need to publicly disclose the performance of its buyout and hedge funds in the firm's financial reports.

Specifically, the SEC had requested last year that both firms publish "performance information" including:
*the name of each fund
*the date it was formed
*assets under management
*net return for each period

One of the most interesting parts of this story is that the SEC in their request utilized Blackstone's and Fortress' own words to strengthen their argument:

1) Fortress (January 26) - provided information
Fortress' CFO (Daniel Bass) stated it would “augment our disclosure” by providing a performance table for “all significant funds” in its annual report.

2) Blackstone (December 5) - did not provide information
Laurence Tosi (CFO - formerly COO of Merrill Lynch's Global Markets & Investment Banking group), responded by telling the the SEC thanks but no thanks. “The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors” he is reported as stating in a letter to the SEC.

That being said Fortress' information disclosure was not 100%, as the company failed to provide annual performance figures for buyout funds that were still making investments or were less than a year old. The SEC stated in a January 30 letter that the agency had finished its review and had "no further comments" - which is SEC speak for this review is essentially finished.

It seems odd to me that a firm, regardless of its size, should get to dictate to the SEC what it will and will not be disclosing. We are presented with two very similar situations in Blackstone and Fortress, yet the SEC apparently has what it deems to be an acceptable double standard here. While criticizing the SEC seems to be fashionably en-vogue these days (and in most cases with good reason) applying different disclosure standards to different groups simply doesn't make sense on face value here.

From a due diligence perspective, I would be very hesitant to invest in the publicly traded shares of either company when such information is not disclosed universally. Due diligence is fueled by information which is obtained via transparency. In this case, Fortress seems to be willing to come to the plate and provide information, while Blackstone does not. But Blackstone isn't to blame, if the SEC is unwilling to implement consistent disclosure standards.

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