Inside Wall Street’s “Side Letter” Scam
For years, Wall Street firms have inked secret deals to give certain investors preferential treatment. The SEC proposed reforms to regulate these “side letters” — but the industry wants to maintain its ability to enrich some investors at the expense of others.
Private equity, hedge fund, and real estate firms are making secret deals with individual investors, giving them privileges not afforded to others in the same investment funds. (Spencer Platt / Getty Images)
For years, the retirement savings of teachers, firefighters, and other government workers have been funneled by public officials to secretive Wall Street firms that charge high fees in exchange for the false promise of outsized returns. But as the stock market plummets and asset values drop, there are new fears that pensioners will be unable to access their cash, while insiders will be allowed to pull their money out before things get worse.
Now, Wall Street firms and their political allies — including a US senator with substantial private equity holdings — are trying to stop federal regulators from intervening to protect retirees by banning firms from giving some investors preferential treatment. And there are no rules requiring lawmakers with investments in private equity to disclose whether they are being given special investment preferences while they lobby to protect those asset managers.
The new battle revolves around the secret “side letters” that private equity, hedge fund, and real estate firms ink with individual investors, giving them privileges not afforded to others in the same investment funds.
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