After a two-year investigation, the U.S. Securities and Exchange Commission told investment giant BlackRock Inc. it may have to defend itself against a civil action involving allegations that one of its former fund managers had a conflict of interest that stretched into the Marcellus Shale.
In a recent public filing, BlackRock disclosed that it had received a Wells Notice from the SEC on June 17. The notice says the SEC’s staff is recommending filing an action against the investment company for what it believes were inadequate disclosures about Daniel Rice’s involvement with one of the companies represented in BlackRock‘s Energy & Resources portfolio.
The investigation could stain the image of the world’s largest asset manager, according to Morningstar analyst Greggory Warren, at a time when the investment community is still recovering its reputation after the financial crisis.
Mr. Rice, who founded Canonsburg shale developer Rice Energy Inc. in 2007, had managed energy funds for BlackRock since 2005.
In 2010, Rice Energy, then a privately held company, entered into a joint venture with Alpha Natural Resources to drill wells in the Marcellus Shale. When Rice Energy went public earlier this year, it bought back its 50 percent stake in the joint venture from Alpha, giving the Virginia-based coal company about $100 million in cash and another $200 million in Rice Energy stock.
BlackRock never owned shares of Rice Energy under Mr. Rice’s leadership, when the company was still private. But it did own Alpha stock before and after the joint venture with Rice.
Critics, including the Wall Street Journal, which wrote a series of articles on the subject in 2012, noted that the BlackRock energy fund managed by Mr. Rice substantially increased its stake in Alpha after the joint venture. In 2012, Alpha was among the fund’s top 10 holdings.
At the time, BlackRock said the increase could be attributed to Alpha’s acquisition of companies already in the BlackRock portfolio and other factors unrelated to Mr. Rice’s family company.
Some analysts raised concerns about the appearance of a conflict of interest. In a June 6, 2012, note to investors, Morningstar analyst Rob Wherry wrote, “Stewardship issues are overshadowing this fund’s merits.”
In July 2012, BlackRock announced Mr. Rice would no longer be managing the energy fund to avoid the appearance of a conflict of interest and would retire from BlackRock in December of that year.
It’s likely that BlackRock has spent the past two years beefing up internal controls, Mr. Warren said.
He believes that if the SEC had found any actual wrongdoing, it would be going after Mr. Rice and would have initiated an enforcement action already.
“It’s more of an appearance of a conflict of interest,” he said. “This is not necessarily just a case for BlackRock but for the industry as a whole. For the SEC, it’s an opportunity to sort of say, ’Listen, industry, if this can happen to BlackRock, it could happen to you.‘”
Whatever happens with the Wells Notice — whether the SEC will be allayed by further material that BlackRock has promised to present exonerating it in this matter or if regulators pursue a civil case against the company — Mr. Warren believes the resulting fine will be minuscule in the context of the world’s largest asset manager.
The New York company has more than $4.3 trillion in assets under management, with about $600 million in its Energy and Resources fund.
The consequence will be in the damage to the company’s image, which is something the industry has taken very seriously since the financial crash, Mr. Warren said.
“It’s a really, really gray area,” he said, “and for somebody like BlackRock that likes to hold themselves as a standards bearer, it’s a bit of a smudge. At the end of the day, it’s a reputational hit.”
Dan Rice, CEO of Rice Energy Inc. and the son of the former BlackRock manager, said his company is not involved in the SEC matter and therefore declined to comment. He said his father would do the same.
Anya Litvak: email@example.com or 412-263-1455.