A US federal judge has rebuked Apollo Global Management for practices that enabled a senior partner at the private equity firm to claim hundreds of thousands of dollars from investors for personal expenses including a friend’s bachelor party and a trip to the Super Bowl.

In a blistering ruling, Judge Kevin Castel ordered the former executive, Mohammed “Ali” Rashid, to pay a $240,000 civil penalty for phoney expense claims that “operated as a fraud” on investors in Apollo’s private equity vehicles.

The judge also heaped blame on Apollo for directing private equity funds it managed for outside investors, who include many of America’s biggest public pension funds, “to pay the entirety” of the bogus expenses. “While Rashid lied on his expense reports and was recklessly indifferent about the source of his reimbursements,” Judge Castel wrote, “significant responsibility lies with Apollo.” 

The September judgment, which has not previously been reported, marks a setback to Apollo’s efforts to draw a line under a scandal that has festered for nearly a decade.

Apollo reported Mr Rashid’s bogus expenses to the Securities and Exchange Commission in 2013, three years after confronting the executive over earlier instances of inappropriate billings. In 2016, the firm reached a $52m settlement with the regulator after a wide-ranging investigation into its financial arrangements with private equity funds. The funds are largely owned by institutional investors but are managed by Apollo, which chooses buyout targets and oversees portfolio companies in exchange for an annual fee and a share of the profits when investments are ultimately sold.

The deal did not require Apollo to admit any wrongdoing, and enabled the group to avoid trial on allegations that included failing to properly supervise Mr Rashid, who had joined the firm in 2000 from Goldman Sachs, and specialised in finding deals among metal and mining companies. 

Mr Rashid was forced out of Apollo in 2014. He was not covered by the firm’s settlement with the SEC, and the regulator filed a civil complaint against the former dealmaker three years later. 

Upholding parts of that complaint, the New York court found that Mr Rashid had committed 32 violations of the Investment Advisors Act. But the judge also gave a more expansive description of Apollo’s responsibility than the one put forward in the SEC settlement, stating that “the fraud effected upon Apollo’s private equity funds also appears to be attributable in part to internal Apollo practices that were unknown to Rashid”.

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During a nine-day trial in New York which concluded in January, regulators detailed dozens of occasions when Mr Rashid submitted “business” expenses claims that Apollo later identified as personal. He ultimately paid back $290,000 to the Apollo funds, although the SEC case only involved a portion of those charges, and the evidence suggests that the Stanford-educated financier paid back more than he improperly received.

Any hope that he would win back his job proved futile. Mr Rashid testified that he forfeited $1.325m of pay and lost “several million” dollars worth of equity interests when he left Apollo.

A $10,049 flight to Brazil

The former dealmaker’s spending spree spanned three continents, according to a review of information submitted on expenses claims, witness testimony and other evidence shown in court.

A $180 charge for a meal with a management team in 2010 turned out to be paid to a vendor called La Contessa — a high-end hair salon rather than a restaurant. A $3,850 charge in 2011, ostensibly for gifts for executives at Apollo portfolio companies, coincided with the same amount being deposited into a store account that Mr Rashid’s father used to buy thousands of dollars worth of designer clothes. After Apollo enquired about the expense, Mr Rashid had luxury brand Ermenegildo Zegna fax a handwritten receipt for $3,500 worth of “ties for gifts”. Judge Castel dismissed the store assistant’s testimony as “crafted to cover for a valued customer”.

In Manhattan, Mr Rashid took friends to Spasso, an exclusive Italian joint favoured by celebrities such Ashton Kutcher. Submitting the $359 bill to Apollo, Mr Rashid falsely claimed that he had been dining with a chief executive of a sheet metal manufacturer owned by the group. In Miami, he enjoyed a $143 dinner with friends at high-end Asian restaurant Hakkasan. “I feel slightly lame for going to a chain,” one of his dining companions wrote in an email, “but it’s a European chain so I got over it.”

G2320_20X A map showing an Apollo partner's intercontinental spending spree

Investors in Apollo’s funds didn’t just foot the bill for the dealmaker’s meals. They paid for his travel, including a $10,049 flight to Brazil for a trip that Mr Rashid characterised as a “vacation”, according to the testimony of a portfolio company executive. A bachelor party in Montreal and a friend’s wedding in Miami were among the other junkets.

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When Mr Rashid travelled to San Francisco to attend his brother-in-law’s funeral in August 2011, the $1,866 plane ticket was charged to an Apollo fund. Mr Rashid explained that he met a Goldman Sachs banker after the service, but his then-wife testified that she did not recall her husband conducting any business during the trip.

Emails between the pair seemed to lay out the former Apollo executive’s method for defraying personal expenses. When his wife, who worked at another private equity firm, noted the rising price of plane tickets for a planned family trip to Dallas in 2010, Mr Rashid advised: “visit your port[folio] co[mpany] on the same trip.”

The court found that Mr Rashid employed a similar technique, “deliberately us[ing] the happenstance of [two business associates] presence in New Orleans at or about the time of the Super Bowl as a false justification for seeking reimbursement” for yet more personal travel. A lawyer for Mr Rashid declined to comment, citing active SEC proceedings that could result in his being barred from the investment industry. His former wife is not accused of any wrongdoing.

Mixing business and personal travel was the norm at Apollo, according to Mr Rashid, who testified to being told: “travel, don’t sit around, go find new deals”. He added that founder Leon Black and other top Apollo executives including Marc Rowan, Josh Harris and Scott Kleinman “[would say] in passing, things like, you know, ‘the firm will cover that’, or ‘the firm will pay for this’ or, you know, ‘just bill it to the firm’”.

Billed regardless

Yet unbeknown to Mr Rashid and many of his colleagues, Apollo often was not paying the bills, but passing them to outside investors.

“It appears that private-equity funds were billed regardless of the nature of the expense, in contradiction to the limited partnership agreements that governed the funds”, wrote Judge Castel, who found the practice so alarming that he mused in court that “maybe there should be more defendants in this case”. 

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He wrote in his opinion that even current Apollo chief financial officer Martin Kelly and his predecessor Eugene Donnelly wrongly believed that Apollo was covering some of the charges.

Apollo said in a statement to the Financial Times that neither it nor any of its current employees were a party to the case, and that “all entities affected by the individual’s wrongdoing were fully and promptly repaid”.

The firm said that it upholds “the highest legal, ethical, and regulatory standards, and has absolutely no tolerance for this type of unacceptable behavior”. It added: “The court’s ruling was solely focused on a former employee’s liability for purposefully falsified business expenses through ‘a pattern of lies’ nearly 10 years ago.”

The ruling from Judge Castel comes eight years after Apollo retained law firm Paul, Weiss to review its expenses systems. The firm, which has represented Apollo in several high-stakes lawsuits and is now advising Mr Black on matters stemming from his relationship with the late paedophile Jeffrey Epstein, found that of 300 top Apollo employees, only Mr Rashid’s expense submissions “warranted more in-depth review”.

The investigation identified about $20,000 of personal expenses incurred by executives other than Mr Rashid that needed to be repaid, but found no widespread misconduct. In fact, in a presentation prepared for the SEC and later filed in court, Paul, Weiss concluded that Apollo had picked up the tab for more than $370,000 of expenses that should instead have been borne by funds it managed for outside investors.

The findings of the investigation by Paul, Weiss now stand alongside those of a federal judge who ruled that “policies and procedures within Apollo contributed heavily to any act of fraud that was effected on investors in the Apollo funds”.

“Apollo, and not Rashid, put in place a policy of invoicing expenses to funds that . . . seemingly should have been borne by Apollo’s own management companies,” Judge Castel concluded.

Via Financial Times