How honest are private equity firms

Dodd-Frank requires private equity firms to register with the Securities and Exchange Commission (SEC). The SEC has just completed an initial examination of 150 of these firms. Andrew Bowden, the director of the SEC’s examinations office, concluded, "When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.” 

Many of these firms buy out companies with the funds supplied by investors. Some of these funds are not used in quite the way the investors expected:

• Employees of the private equity firm are fired and then rehired immediately as “consultants.” The investors are responsible for consultants’ salaries, where private equity employees are paid out of their own pockets. 
• Investors are billed for what should be management fees of the firm, such as legal and compliance costs
• The private equity firms lie about the valuation methods they use to tell investors about the returns they make each year.