Today we have a case study of how readily top officials of private equity firms make flagrant misrepresentations, in this case, under penalty of perjury. Here, the purpose is to pretend that information that is not even remotely confidential is not just confidential, but rises to the lofty “trade secret” status. Recall that “trade secret” is a high bar from a legal standpoint, that is it as valuable from a commercial standpoint as the formula for Coca-Cola or the schematics for Intel’s next microprocessor chip.
The example is from a response by the Florida State Board of Administration to a Public Records Law request (its version of a FOIA) for Blackstone’s communications regarding the SEC investigation and settlement announced on October 7, 2015.
The SEC settlement with Blackstone was over two abuses, improperly allocating legal fee discounts and charging undisclosed “termination of monitoring fees” (for background, see how these fees for services never rendered work). Blackstone agreed to the wet-noodle lashing of paying $10 million plus $29 million in interest and disgorgements.
Now here’s the fun part. We received a letter Blackstone sent to the relevant limited partners, including Florida, on October 7, 2015, the date the SEC’s order was made public. Florida provided a heavily redacted version of Blackstone’s October 7 missive, along with a declaration by Omar H. Rehman, a Managing Director of Blackstone. We have embedded both at the end of this post.
Rehman made elaborate arguments as to why the October 7 letter contained information that was both confidential and trade secret, and therefore could be released only with the redactions that Blackstone insisted upon.
We were able to recover the text from some of the redacted sections. When you look at the redacted language that is exposed, you can see that Rehman’s claims are utter hogwash. Rehman has clearly committed perjury.
Florida was remiss in taking his word at face value, since as we will demonstrate, some of the text by its own admission is not confidential and thus cannot constitute a trade secret either. Florida failed in its duty of making an independent assessment of whether the redactions insisted on by Blackstone were defensible.
Why are Rehman’s claims obviously false? You can’t make information that is in the public domain confidential. If you read the redacted sections that we’ve exposed in the letter below against the SEC order (the third document below), you’ll see virtually all of this supposedly confidential information was in the SEC order! And that makes the stronger claim, that somehow Blackstone would suffer competitive harm via revelation of material in the letter to limited partners, laughable.
Just look at the first sentence that was redacted: that Blackstone had told investors earlier that the SEC had been looking into the two abuses on which Blackstone has just settled. The order states that Blackstone had disclosed to investors after they were stuck in the funds that it had been applying legal fee discounts unequally and that Blackstone started making more disclosures over time that it about its termination of monitoring fees prior to the settlement. That meant investors should have had at least a dim idea that something sus had been going on.
So what exactly is confidential here? That Blackstone told investors that the SEC had been sniffing around prior to the settlement? You’d expect to Blackstone to have been required to make that sort of disclosure in light of the settlement.
Pray tell, what is Blackstone trying to hide in this first redaction, at the very beginning of the letter? Is it trying to forestall FOIAs of those notification letters it says it sent out earlier? Notice that the Rehman declaration letter (the second PDF) mentions that “redacted portions are available only using a Blackstone-operated secured information portal.” It is common in the private equity world to have general partners have various notifications and other investor communications sit on their servers where the limited partners can read and download them. Could Blackstone be trying to avoid FOIAs for these letters because it removed them from its servers? And if so, what could be the justification?
You similarly have to struggle to find any logic for the later redactions that we’ve revealed. So what if the mix of legal work was “different”? This seems like a spurious effort to make Blackstone’s conduct sound less bad that it was. Does Blackstone therefore think it’s important to to hide that it’s grasping at any straw to make its conduct look less bad? And regardless, why is that declaration confidential? The parenthetical is so unclear as to have no information value, and hence not be capable of being confidential, let alone “trade secret.”
In keeping, how can Blackstone pointing out the absence of an admission in the following paragraph be confidential?
And the long, blacked-out section in the fourth paragraph is largely the same as information presented in the SEC order. The only difference is that the Blackstone letter is a tad more specific, as to how the information was presented to investors. For instance, it lists the various channels by which Blackstone says it alerted investors over time that it had been charging previously undisclosed termination of monitoring fees: “in distribution notices, quarterly reports, and in the case of IPOs, via S-1 filings.” So the fact that Blackstone has particular, established channels for conveying information to investors that are used by competitors for making similar communications is supposed to be confidential? It’s as if a public court document said, “Joe Smith gave testimony at 10:00 AM” and Blackstone is trying to make that confidential by saying, “Joe Smith went through security [as everyone who appears in this court does] and gave testimony at 10:00 AM.”
And the last section we exposed, in the fifth paragraph, speaks for itself. Blackstone says it “previously disclosed publicly” what follows. Ergo, it’s not a secret. Even if the folks who handle public records requests for Florida might have hesitated to get into Blackstone’s version of the Clintonian “It depends upon what the meaning of the word ‘is’ is” parsings on the earlier blackouts, this section admits on its face that the information is public and should thus not be hidden.
The trade secret claim is even more ridiculous. What in a letter to investors about an SEC settlement could possibly constitute a trade secret? Remember, a trade secret is something of such significant competitive value that the company would suffer irreparable harm if it were disclosed. Are we to believe that Blackstone has some secret hocus pocus in its negotiating strategies with the SEC, and even more incredible, that it could and would convey them to limited partners in a one and one-half page memorandum?
Limited partners are either too cowed or too clueless to question obviously barmy declarations like those of Rehman. I encourage readers to have a good look at his document. It effectively makes the argument that how Blackstone handled the information makes this tiny, inconsequential letter largely confidential and trade secret. But as we pointed out, you can’t make public information confidential, and the mere handling of information alone does not make it secret.
Here is what this incident reveals:
Blackstone, like most other private equity firms, operates on the Humpty Dumpty legal principle that words mean what Blackstone says they mean, not what independent parties or well-established legal precedents say they mean. “Confidential” is “whatever I tell you not to disclose,” and “trade secret” is apparently “anything we think has even the slightest possibility of embarrassing us.”
Florida, like most limited partners, refuses to exercise any independent judgment when firms like Blackstone take ludicrous positions.
Blackstone staff is willing to commit perjury over a remarkably penny ante matter. That should make investors and the SEC plenty worried about what lengths they are willing to go to when the stakes are much higher.
I hope readers in Florida will send this post to their state legislators in the Senate and House, as well as their Senators (contact information here) and Representatives (contact information here) in DC.
Tell them that it’s disturbing not simply to see the state pension fund officials aid and abet perjury, but that this incident also raises troubling questions about the integrity of Blackstone executives, particularly when it follows right on the heels of the Blackstone agreeing to settle with SEC on allegations of misconduct. Blackstone appears incapable of turning over a new leaf and Florida officials are unwilling to ride herd on Blackstone when Blackstone is clearly in the wrong and the public has an obvious interest in finding out about the firm’s dubious actions. Florida citizens have good reason to be concerned.