The Three Pillars of Private Equity Secrecy

The private equity industry has worked long and hard to keep its abusive practices secret from the public and investors.

The three pillars of private equity secrecy are: (1) Getting investors to agree to keep confidential industry misdeeds; (2) Getting investors to permit firms to withhold damning disclosures; and (3) Prohibiting employees from reporting wrongdoing.

The private equity industry has long worked hard to keep its most abusive business practices secret from the public and investors. This has been a concerted industry effort—not merely the work of a few “bad apples.” While conspiracy theories are usually far-fetched, evidence of a private equity conspiracy to keep the public and investors globally in the dark is abundant.

The threshold question is: How can an industry that raises trillions from millions of investors globally, including America’s state and local pensions subject to comprehensive public records laws designed to ensure transparency and public accountability, keep its unscrupulous business dealings, reckless investment strategies and unverified performance claims from public view? This is no easy task. Nothing less than a complete wall of secrecy must be crafted and enforced. If any investor “spills the beans” exposing abuses including bogus fees and wildly inflated portfolio valuations, the private equity house of cards collapses and every investor loses.

Think about the voluminous offering and disclosure documents and reports resting in the hands of wealthy and institutional investors. Each and every investor had to be convinced, or coerced, to keep these sketchy documents secret.

Think of the thousands of public pensions in America that had to agree to allow private equity firms to withhold disclosure materials from both the public and the pensions themselves—in order to thwart disclosure to pension stakeholders, including pensioners and taxpayers. In every state, county and city in America, the industry had to successfully persuade government officials that private equity investment documents constituted “trade secrets” exempt from public records laws. Every state, county and city official in America today has not-so-coincidentally agreed with the industry’s twisted logic: Documents widely disseminated to tens of millions of investors (and would-be investors) can be trade secrets.

If even one state official had agreed with this preposterous proposition, that would be a huge “red flag” suggesting corruption. But they all have—when asked by the industry for this favorable ruling.

How did the industry convince investors, including fiduciaries with a legal duty to prudently invest other people’s money, to be complicit in a conspiracy of secrecy? It’s bodacious.

Wall Street had to boldly, audaciously claim that secrecy and withholding of documents was in the investor’s best interest.

How do you convince investors, including fiduciaries with a legal duty to prudently invest other people’s money, to be complicit in a conspiracy of secrecy? It’s bodacious.

Wall Street had to boldly, audaciously claim that secrecy and withholding of documents was in the investor’s best interest.

The promise of riches had to be so alluring that investors were distracted from the obvious: Lack of scrutiny allows for, and even encourages scamming because the wrongdoers know their shadow dealings will never see the light of day.

Private equity firms have bodaciously claimed:

“In order for us to work our “magic,” we must be allowed to operate in secrecy.”

“Do not look behind the curtain or the magic won’t work.”

“If everyone knew what we were doing—the secret sauce—the best deals would be snatched from us by others.”

“Secrecy is your friend, not your enemy.”

While conspiracy theories are usually far-fetched, evidence of a private equity conspiracy to keep the public and investors globally in the dark is abundant.

I have written extensively about the first two pillars of private equity secrecy:

1. Wall Street gets investors to contractually agree to keep confidential information regarding its misdeeds; and

2. Wall Street gets investors to agree to allow firms to withhold information from them which might be embarassing or harmful to the firms if disclosed.

But getting clients to be complicit in the Wall Street secrecy scheme is not enough. The third pillar in the secrecy scheme involves requiring Wall Street insiders— employees and former employees—to keep industry secrets.

This requires a “carrot and stick” approach. First, employees must, as a condition of employment or separation, sign agreements prohibiting disclosure and reporting of potential wrongdoing to anyone, including law enforcement and regulators. Of course, current and former employees must be led to believe such contracts are enforceable. Second, current and former employees must fear losing any deferred compensation they may have coming to them if they violate these secrecy agreements.

By way of example, in connection with an industry sweep into various agreements companies ask employees to sign that contain language that could hinder the reporting of possible federal securities law violations, D.E. Shaw, a hedge-fund giant with over $100 billion in regulatory assets under management, recently entered into a settlement with the Securities and Exchange Commission. The firm agreed to pay $10 million to settle allegations the hedge fund’s employment agreements and separation releases with employees contained language preventing whistleblowers from coming forward.

D.E. Shaw required new employees to sign employment agreements that prohibit the disclosure to anyone outside of the company of confidential information gained through employment that could be damaging to the firm, unless the disclosure was authorized by D.E. Shaw or required by a court order, according to the SEC.

The agreements, used from at least 2011 to 2019, lacked a required carve-out to exclude potential SEC whistleblowers, the SEC said.

As a condition of receiving deferred compensation and other benefits sometimes worth millions of dollars, D.E. Shaw also required 400 of its departing employees to sign releases that attested they hadn’t filed a complaint against the company with any federal agency, the SEC alleged. 

True, Shaw is a hedge fund—not a private equity firm. However, I am told similar employment and separation secrecy agreements abound in the private equity industry. We’ll never know for sure because…. like everything else in the private equity industry, these employment agreements are kept secret.