Investors Not Reassured by Apollo Trying to ‘Splain Leon Black’s $188 Million in Payments to Serial Child Rapist Jeffrey Epstein

Apollo’s efforts to contain the fallout from co-founder and now former CEO Leon Black having paid boatloads in fees and loans to Jeffrey Epstein after he was convicted of child prostitution are not succeeding.

As we’ll discuss shortly, Apollo had commissioned an whitewash investigation by law firm Dechert to reassure investors that nothing too unsavory had happened, and get them to stop their capital strike against the giant fund. However, the Financial Times reported yesterday that the UN’s pension fund is keeping Apollo on a watch list and the Pennsylvania Public School Employees Retirement System is sticking to its guns: From the Financial Times:

A report by lawyers for Apollo Global Management into the ties between Leon Black and the late paedophile Jeffrey Epstein is “not enough” to remove the company from a watch list of investments that require extra scrutiny, a top UN pension fund official has said…

Apollo was put on the UN Joint Staff Pension Fund’s watch list in July 2019 after reports of Mr Black’s ties to Epstein, a UN official said. The $80.3bn pension fund has invested with Apollo since at least 2013…

The Pennsylvania Public School Employees’ Retirement System, which said in October it was not considering any new investments with Apollo, showed no sign of reconsidering its position in the wake of the Dechert review.

“I refer you to our previous comment . . . and decline further comment,” said Steve Esack, a spokesman for the fund.

The $40bn Connecticut Retirement Plans and Trust Funds said it had “reviewed Apollo this spring and determined, based on a variety of due diligence criteria, they did not meet our standards for making a new capital commitment”.

In fairness, the pink paper did say that the report plus some governance changes at Apollo, like changing the dual-class share structure so as to reduce Black’s grip on the company, were enough to placate some investors, like UK’s South Yorkshire Pensions Authority which had made close to £29 million in commitments to three Apollo funds from 2013 to 2019. But the UN pension fund reaffirming its Apollo red flags will sway other pension funds.

So why are many, and perhaps most, big pension fund investors not satisfied with the Apollo report? The short version is bad headlines plus bad details.

The UN pension fund acted after the first big media story on the troubling close relationship between Black and Epstein: Bloomberg’s Jeffrey Epstein Had a Door Into Apollo: His Deep Ties With Leon Black, in July 2019. But as we pointed out then, most investors, like CalPERS, merely went into pious hand-wringing mode.

The scandal grew to an entirely new level last October, when the New York Times broke the story that insiders reported that Black had paid at least $50 million and perhaps over $75 million in fees to Epstein from 2012 to 2017. After Black’s mumbled denials and foot shuffling failed to calm rattled investors, Apollo commissioned Dechert to poke around and put the best possible spin on the facts.

Apparently just about everyone with an operating brain cell reacted as we did when the report came out: Why Apollo’s Palace Coup Against Leon Black and Further Disclosures on Jeffrey Epstein Are Not Reassuring.

Dechert did say there was no evidence that Black was caught up in Epstein’s illicit activities or that Epstein had even tried foisting an underaged girl on him. However, that was about as good as the good news got.

First, the numbers were so much worse than what the Times had initially found. The report stated that Black had paid $158 million, more than twice as high as the Times’ original top figure, plus $30 million in loans, only $10 million of which had been repaid.

Second was that the claims about what all that money was for were wildly implausible. From our post:

The shock value of the magnitude of the payments to Black may succeed in diverting press and investor eyes from the real scandal here: what was Black paying for? And was Apollo implicated? Bear with me, because the supposedly reassuring excerpts from the report by law firm Dechert actually suggest that Apollo was involved too….

This is how Dechert attemptsed to justify the transfers from Black to Epstein. From the Wall Street Journal:

Mr. Black “believed, and witnesses generally agreed, that Epstein provided advice that conferred more than $1 billion and as much as $2 billion or more” in tax savings, the report states.

It also supports Mr. Black’s contention that he paid Epstein a fee he believed was roughly equivalent to 5% of the value that the late financier generated on an after-tax basis.

We’ll deal with the second howler first, that someone like Black would pay for mere advice on a percentage of results basis. As Black knows well, the people who get rich to very rich attach themselves to capital and get paid a percentage for performance, such as brokerage or asset management fees. Black, who buys legal services from the very best firms in the US in bulk, would know he could hire the most cunning tax lawyers in the US for a fraction of what he paid Epstein. He could even have financed a firm with the very best minds in the industry for this kind of dough. And in earlier accounts, Black also asserted that all of Epstein’s advice was vetted by independent experts.

So it seems reasonable to think that Black was not paying just for advice but some kind of execution too, as in moving funds and engaging in sham transactions to recharacterize the economic substance or apparent ownership of funds.

So it’s hard to see Dechert with a straight face parroting Black’s defense that he was paying 5% of the economic value of what is presented as mere tax advice as if that were a reasonable compensation arrangement.

But let’s go back to the first eyepopper: tax savings of $1 billion to over $2 billion.

Let’s be charitable and use Black’s maximum applicable tax rate: a marginal tax rate of about 50% for Federal, New York state and New York city income taxes. That means the amount of Leon Black personal income subject to Epstein’s wizardry, again charitably assuming he managed to find a way to bring Black’s taxes from 50% to zero, would be double the savings, or $2 to $4 billion.

If you read the post, we worked though the implications. It seems impossible to get to anything like these numbers unless you assume some of the income came from fees and expenses coming directly from the portfolio companies which did not go through Apollo. But for Black to achieve different tax outcomes than he’d received before, the income would have had to be distributed or characterized differently. That requires the cooperation of portfolio company employees, who are managed and controlled by Apollo, not Black personally.

And that’s before getting to the other glaring problem with the Dechert/Black story: it’s hard imagine this much in tax being saved without Black having engaged in tax evasion, as opposed to tax avoidance (which he could buy all day from all sorts of cunning white shoe providers for a mere fraction of what he paid Epstein).¹

An indirect confirmation of how fantastically inexplicable the “payments” to Epstein were: the Financial Times almost immediately ran a long and obviously planted story about what great buddies Black and Epstein had been and how Epstein served as Black’s money major domo, handling everything from audits to art buys. This didn’t pass the smell test with the investment-savvy. A non-lawyer, non-accountant as the front person with tax examiners? Epstein as another layer of costs and bureaucracy on top of Black’s family office pros? And the serious art buyers I know give money to the likes of the Fogg Art Museum and the Met, where they can typically get input from museum curators, who are top pros in their fields, on planned major purchases (the understanding being some of those works will be bequeathed, but there’s no way to enforce these understandings). As one business school professor who specializes in private equity said via e-mail:

I read your piece after I read that of the FT. I thought that your point that tax advice is BS to the power ten was spot on and well seen. Amazing that FT journalists and others would not pause a sec and think: hold on Dechert, that’s BS. They just summarize the info they are given, that’s it.

Some experts came up with additional possibilities of the services Black was actually buying from Epstein. A law professor argued it could be blackmail after Epstein had paid bribes on behalf of Black.

The problem I have is the only place where the bribes might have delivered enough value would have been to sovereign wealth fund officials in return for fund contributions. The flip side is the fund contributions are so large that big bribes are possible and you don’t necessarily have to throw in blackmail.

But then you get to the question of why would Black do this sort of thing personally, and not through Apollo. If I am right and some of the targets were foreign officials, that’s an Foreign Corrupt Practices violation, which is criminal. Why would Black put that target on his back, and not Apollo’s?

But then again, if Apollo were caught bribing foreign officials, pretty much no US public pension fund could invest in Apollo. They might even have to renege on their current commitments, since most government entities have strict prohibitions against doing business with firms charged with criminal conduct. That’s why Eliot Spitzer’s threat to indict AIG gave him the leverage to force the resignation of Hank Greenberg: many legal experts argues the mere filing of a criminal case would force many government players to halt activity with AIG. So Black would be less exposed than Apollo would be in this scenario.²

As much as this may sound like a stretch, recall that Apollo has paid what amounted to bribes, although a tremendous amount of energy has been expended on the fiction that Leon Black was victimized by former CalPERS board member, later placement agent Al Villalobos.³ Apollo paid $48 million in placement agent fees to Villalobos, some of which wound up as cash in paper bags as a bribe to CalPERS’ CEO, Fred Buenrostro. Villalobos committed suicide after he was indicted; Buenrostro was sentenced to four and one-half years in Federal prison.⁴

But here’s the mystery of that case. Apollo supposedly paid $48 million to get meetings at CalPERS. To this day no one who know CalPERS can fathom why Apollo paid a big fee, much the less any fee, to Villalobos. Apollo didn’t need Al Villalobos to get meetings at and big commitments from CalPERS. There is no evidence that the Villalobos intervention resulted in a dime more going to Apollo than it would have gotten otherwise.

So the bribe was unnecessary and Villalobos was a very odd agent to use (as in sleazy). But Villalobos was raising his hand to do the dirty work for anyone. And apparently a lot of the $48 million paid to Villalobos disappeared; it was never found after he committed suicide. So perhaps the money paid with respect of CalPERS was going to other actual or planned dirty work.

The larger point is simple: the official story about Black and Epstein is simultaneously implausible and doesn’t show Black in a good light. That says to pretty much everyone that the real story is worse, potentially much worse. Maybe we’ll find out, but I am not holding my breath. Dead men tell no tales.

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¹ No one in the PE industry thinks Black was partaking of Epstein’s underage offerings, much the less extorted for having done so. Remember, on deals, even the big honchos will work long hours and so the minions get a good view of their habits. In addition, Black and Epstein were on friendly social terms, whereas it’s hard to imagine anyone being buddy buddy with their blackmailer. Finally, if Epstein started making big demands for his silence, there were plenty of ways to silence him other than paying him nearly $180 million (the fees plus the outstanding loans).

A prosecutor added:

I initially bought the theory that Epstein and Maxwell were fronting a Mossad blackmail operation, but Epstein’s “friends” don’t act toward their purported “blackmailers” the way I would expect people with something that dark to hide to behave. Most pedophiles I have seen in the dock are quite unashamed of themselves, to a shocking degree — just as Epstein seems to have been. At least one of these Masters of the Universe would have preferred exposure to forking-over tens of millions to blackmailers.

I also agree — and your evidence strongly confirms — that Black’s payments weren’t a fee for tax or trust/estate planning. Whatever “planning” was going on involved hiding assets.

On the hiding assets or other outside-the-banking-system transfers: Epstein’s island was 5 miles from the British Virgin Islands. So a helicopter or a small plane could easily surveil the waters and a boat could make a run over with cash. A large suitcase full of $100 bills = $10 million. You could probably several suitcases like that on a private plane without much difficulty.

² This law professor threw more cold water on the Black/Dechert position that Epstein was actually or implicitly paid on a percentage of tax savings basis:

I’ve only heard of a percentage deal being offered once to an individual lawyer: Marty Ginsburg (RBG’s husband) did a few hours of work for Ross Perot when he sold EDS to GM and saved Perot hundreds of millions. Perot wanted to give him a percentage; Marty insisted on his hourly rate. Perot then decided to endow a chair in Marty’s honor at Georgetown on the condition it go to Marty. Marty, being an incredibly modest guy, said he wouldn’t accept. So Perot threatened to endow the chair at Bob Jones University. Marty relented on the condition that the chair be filled by someone else.

³ Villalobos was a sufficiently accomplished con artist that he got on CalPERS’ board under false pretenses. He was on the State Personnel Board, which then chooses one board member as its CalPERS representative. I’ll update this section when I get the details of Villalobos’ ruse, but my early AM recollection is that Villalobos told his fellow SPB members that the Governor wanted him on CalPERS board. When his story was found to be false, Villalobos was voted off the CalPERS board.

⁴ For those of you with overactive minds, there is no similarity between Villalobos’ suicide and Epstein’s, as in no lingering mystery. Villalobos went to a shooting range, fired some rounds, then turned the gun on himself.