Claire’s Stores: Private Equity Broker-Dealer Violations in Action

[Jefferson23]

**This should be easy pickings for the SEC.

Posted on January 21, 2014 by Yves Smith

In an earlier post, we discussed the ongoing violation of SEC broker-dealer regulations by private equity firms when they collect “transaction fees” for buying and selling companies on behalf of the funds they manage. The 1934 Exchange Act mandates that only SEC-registered broker-dealers may collect transaction-based compensation (subject only to limited exceptions which are not germane here ). Very few private equity firms are registered as broker-dealers (and even those are flouting the law in ways we’ll discuss later). This means that almost all PE firms are engaged in ongoing violation of the ’34 Act.

Today, let’s look at a particular transaction that not only illustrates this type of violation, but also contains other egregious mis-statements in order to hide truth.

In May 2007, a fund controlled by Apollo Global Management bought Claire’s Stores, Inc. Those with young daughters may be know this chain of 3,500 stores, which sell mostly hair accessories and very inexpensive jewelry aimed primarily at children. This was a height-of-the-bubble PE deal that barely escaped bankruptcy. Apollo took Claire’s private for a $3.1 billion purchase price and financed the deal by loading Claire’s with $2.4 billion of debt.

The deal was aggressive, not only in its very high leverage ratio, but also in the way Apollo “papered it up.” At the closing, Claire’s executed a “Management Services Agreement” with Apollo, where the company agreed to pay Apollo and its co-investors $3 million a year for ten years as payment for nebulously defined services purportedly to be provided by its PE overlords. In addition, the company agreed to pay Apollo $20 million in the form of what the agreement referred to as a “transaction fee.” (see section 2.3 in the embedded document).

Claire's Stores Management Services Agreement:

http://www.nakedcapitalism.com/2014/01/claires-stores-private-equity-broker-dealer-violations-action.html