SEC Investigation and Group Risks
Past is prologue. Brookfield is likely the subject of an ongoing SEC investigation. FOIA requests turned-up a previous investigation. Corporate structure amplifies financial and legal contagion risk.
I have long viewed financial contagion as a key risk with the Brookfield group. It is a predictable consequence of the corporate pyramid structure. Levered operating companies often have numerous holding companies above, both public and private, all dependent on the cashflows of the asset at the bottom. In such structures, asset level financial distress is contagious and can spread to dependent entities.
Brookfield’s vulnerability to financial contagion should be clear to investors after the BPY episode. In my opinion, Brookfield repurchased BPY to prevent the partnership’s failure and potential loss of confidence the related-party business model in general. However, contagion risks may go beyond the financial. Examination of SEC investigations into Brookfield suggests that legal contagion is also a real risk.
In July 2023, I received a report from Disclosure Insight (DI), a service that discovers and catalogues SEC investigations. The report indicated that there has been an investigation into Brookfield since May 2022. The exhibit below shows a piece of the report.
Outtake from Disclosure Insights
Source: Disclosure Insights.
DI’s work detects investigative activity, but I believe the content remains private until the investigation is concluded. However, in Brookfield’s case, DI references an earlier investigation that I had discovered independently.
Several years ago, I conducted a FOIA request on Brookfield. The return package included notification that between 2014 and 2017 companies in the Brookfield group were the subject of an SEC investigation. The headline picture in this post shows part of the cover sheet. In the exhibit below, I show a part of a document received which lists the allegations in the case.
SEC Action: Summary of Allegations
Source: SEC. Note: DI states that they have a rich library on this case. I encourage interested parties to contact the firm directly at www.probesreporter.com.
The allegations are wide-ranging, including “devices, schemes, or artifices to defraud”. Given the case went on for several years, it appear to have been serious. To my knowledge, neither the 2017 nor the current investigation have been disclosed to investors.
Cursory examination of information from the first investigation indicates that legal contagion is a serious concern. The title “Brookfield Infrastructure Partners & Related Entities” suggests the investigation with Brookfield Infrastructure Partners (BIP), but encompassed others in the group as well.
The related-entities aspect is critical, because within the Brookfield ecosystem there are almost always related-parties involved.
The group often has cross-ownership of assets and entities along with accounting linkages. For example, BIP consolidates discrete assets from Brookfield-managed private funds. Brookfield Renewable Partners (BEP) consolidates entire funds that contain the assets consolidated by BIP. Brookfield Corporation (BN) owns a stake in the public partnerships, performs the accounting from asset to public entity, and consolidates them all.
Brookfield entities are separate from a legal and trading perspective, but below the surface capital and business processes are intermingled creating an interconnected and interdependent web of entities.
As a result, a legal/accounting issue at a single asset could easily impact the private fund that owns it along with the three public companies that own interests in the fund and one another.
The risk of financial contagion, always present, became easily identifiable when crisis hit BPY. The multi-entity nature of the 2017 SEC investigation indicates that legal contagion is a serious concern as well. In my view, given the corporate structure, contagion seems less a risk than an inevitable outcome.