PAAMCo Probed Amidst Ownership Questions

Oct 29 2010 | 1:51am ET

Following a judge's ruling that Pacific Alternative Asset Management "may have been designed to mislead" about its woman-owned status, the Securities and Exchange Commission has launched an investigation into the fund of hedge funds shop.

In a letter to investors, PAAMCo indicated that U.S. District Judge Richard Sullivan's ruling sparked the SEC's interest, Pensions & Investments reports. Sullivan in August granted Paloma Partners founder S. Donald Sussman, who seeded PAAMCo, a 40% stake in PAAMCO Founders, the fund of funds' parent company. Sullivan wrote in his decision that PAAMCo had structured Sussman's investment as a loan so that it would "qualify as a women-owned business," possibly misleading "a number of observers, from the tax authorities to the SEC to entities wishing to invest in women-owned businesses."

PAAMCo has denied Sussman's take on the situation, noting that it has never pursued mandates designed specifically for women- or minority-owned firms.

The fund of funds said it was cooperating with the SEC after it "determined it was important to proactively reach out to the SEC about the decision." PAAMCo said it had met with SEC representatives in Los Angeles and "answered all of their questions about the case."

Whether or not the SEC finds any wrongdoing on PAAMCo's part, the Sullivan ruling has already cost it a $36 million mandate. The Los Angeles Water and Power Employees' Retirement Plan fired the firm on Wednesday due to the uncertainty raised by the Sussman case.

"PAAMCo has made it clear that Donald Sussman's equity ownership in PAAMCO Founders is a passive position and that he has no controlling interest," Neil Rue of the pension's consultant, Pension Consulting Alliance, wrote in a report to LAWPERP's board. "However, after further review with staff and PAAMCo, PCA feels that the long-term implications of Mr. Sussman and the subsequent loss of expected revenue will detract from the value of the WPERP portfolio."

Rue counseled the pension to launch a search for a new fund of hedge funds manager, but WPERP Chairman Javier Romero would not confirm that one had been authorized.


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