A whistleblower wants to take away private equity's 'crack cocaine'

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Are private equity firms about to become much less private? Or lose an easy way to make tens of millions of dollars? One of the two is likely if an anonymous industry executive's whistle-blower complaint gets traction.

Crain's New York Business has reported that a "senior" private equity insider filed a compliant with the Securities and Exchange Commission earlier this year about the so-called transaction fees that PE firms often charge when they buy a company.

At issue is whether relatively lightly regulated private equity firms can advise on transactions just like an investment bank without registering as a broker-dealer. Such a designation would come with greater regulatory oversight, something PE funds would hate.

The whistler blower, who stands to make up to 30 percent of money recovered by the government, argues that private equity firms are violating federal securities law by awarding themselves multi-million dollar payments for sealing a deal, such as the $40 million Clayton Dubilier & Rice took in 2011 when it closed its $3.2 billion acquisition of Emergency Medical Services.

(Read more: Private equity firms brace for 'mafia' style scrutiny)

The private equity industry has been indignant in reaction, mostly because fees are often disclosed during a deal and haggled over with fund investors.

"This is a waste of time," said one private equity firm employee who asked to remain nameless. "The fee is a negotiated deal between very sophisticated parties. No one is being taken advantage of here."