Aletheia struggling to stay afloat

Bankruptcy filing, lawsuits, SEC investigations compound lost AUM

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Fighting: Peter Eichler blames the firm's Chapter 11 filing, in part, on costs of a lawsuit with his former partner.

Peter Eichler Jr., CEO and co-founder of Aletheia Research and Management Inc., is fighting for his firm's life, but faces possibly insurmountable odds.

Disclosures last week that the staff of the Securities and Exchange Commission is recommending fraud charges be brought against Aletheia's management came on the heels of the firm's filing earlier this month for Chapter 11 bankruptcy protection.

“You can stick a fork in them, they're done,” said Michael Rosen, founder and chief investment officer at investment consultant Angeles Investment Advisors LLC in Santa Monica, Calif.

Also last week, U.S. Bankruptcy Court Judge Barry Russell in Los Angeles questioned whether the company will survive if reorganized.

The latest bad news for the Santa Monica, Calif.-based money manager came on Nov. 21 in bankruptcy court, where SEC attorney Gary Leung said commission staff had informed Aletheia officials in a letter that they intend to seek approval from SEC commissioners to bring fraud charges against the firm's management.

Sources say the investigation involves accusations of improper trading practices by Mr. Eichler, who is also Aletheia's chairman and chief investment officer.

Mr. Eichler did not return phone calls.

Mr. Leung said Aletheia management was sent a Wells notice Nov. 14, saying the agency's enforcement staff wants to bring civil charges for violations of the anti-fraud, disclosure and internal controls requirements of the Investment Advisors Act of 1940 and the Securities Exchange Act of 1934.

Mr. Leung said the charges involve current management and that the SEC staff wants disgorgement of ill-gotten gains from officials and payment of civil penalties.

Aletheia and its two top officials at the time paid a combined $400,000 fine to the SEC in 2011 to settle charges that they did not tell clients the SEC had found deficiencies in the company's record keeping.

The firm was a success story of the late 1990s. Founded by Mr. Eichler, a third-generation Los Angeles money manager, and his business partner Roger Peikin, the firm grew quickly as its growth equity strategy outperformed the Standard & Poor's 500 stock index.

Under Mr. Eichler, Aletheia grew to almost $10 billion in assets in early 2008. Aletheia's fall in the past three years has been fast and furious, fueled by legal disputes, subpar investment performance and the SEC investigations.

Mr. Eichler blames the Chapter 11 filing on the cost of defending ongoing lawsuits between Aletheia and Mr. Peikin, and another lawsuit between Aletheia and Proctor Investment Managers LLC, which purchased a 10% stake in Aletheia in 2006, court papers show.

Mr. Eichler ousted Mr. Peikin as general counsel, chief financial officer and executive vice president in 2011.

Court papers show Aletheia has only around $300,000 in operating capital. Its debtors include the California Franchise Tax Board, which is seeking $2.1 million in back taxes. The back taxes are a major problem; the tax board suspended Aletheia's corporate registration to operate as a business in California on Oct.1.

Getting its corporate registration reinstated is crucial for Aletheia because the firm has no legal standing to defend the lawsuits by Mr. Peikin and Proctor or operate as a business. Bankruptcy protection would also help Aletheia because the Peikin and Proctor suits would be stayed.

$25 million owed

In total, the firm owes more than $25 million to creditors, court records show. But the bankruptcy proceedings aren't going smoothly.

Ron Maroko, a trial attorney for U.S. Bankruptcy Court trustee Peter Anderson in Los Angeles, said in court papers last week that he is evaluating whether to file a motion to dismiss Aletheia's bankruptcy filing because Aletheia has no right to initiate any court action because it no longer is a valid California corporation.

Mr. Maroko also said Aletheia has not shown it has sufficient cash flow to continue to operate.

Indeed, Mr. Eichler's game plan is unclear.

Neither he nor the firm's bankruptcy lawyer — Brian Davidoff of the Los Angeles firm Greenberg, Glusker, Fields, Claman & Machtinger LLC — returned numerous telephone calls.

By all accounts, Mr. Eichler has managed to maintain an affluent lifestyle despite his firm's troubles. Mr. Eichler and his wife, Christy, paid $4.5 million for an almost 5,000-square-foot, five-bedroom and five-bath house in the upscale community of Pacific Palisades last December, property records show. Mr. Eichler goes to work in a chauffer-driven Maybach, say those familiar with his lifestyle.

Aletheia's assets under management were listed at $1.4 billion as of Sept. 30, according to its latest SEC filing, down from about $6 billion on June 30, 2011, and $7.5 billion on March 30, 2011.

Subpar performance of Aletheia's once-winning growth equity strategies gave clients such as the $513 million Austin (Texas) Police Retirement System reasons to terminate the firm this year.

The Austin pension fund terminated Aletheia in April because of performance, said Sampson Jordan, CEO of the fund.

For the year ended Sept. 30, Aletheia's growth equity strategy composite returned 10.84%, compared to the Russell 1,000 benchmark return of 29.19%, according to data provider eVestment Alliance, Marietta, Ga. The strategy also underperformed for the five years ended Sept. 30, producing annualized returns of -3.73% compared to the benchmark returns of 3.24%, eVestment Alliance data show.

Even if Aletheia survives, consultants say it's almost impossible that firm officials will be able to attract institutional clients again.

The integrity questions alone will scare away clients, even if the firm is able to survive financially, said Janie Kass, a consultant to money managers and managing director at the Margolis Advisory Group Inc., San Francisco. “In our business, integrity is at the core of a firm's ability to survive and thrive,” Ms. Kass said.

One major client, Renaissance Investments, a subsidiary of CIBC Asset Management Inc., Toronto, has stuck with Aletheia as a subadviser, at least so far.

CIBC spokesman Kevin Dove said all assets subadvised by Aletheia are held by either CIBC Mellon Trust Co. or CIBC World Markets as custodians, and are not affected by the bankruptcy filing. “We continue to monitor the situation,” Mr. Dove said.

Court filings

In court filings in connection with the bankruptcy filing, Aletheia blames the firm's problems on both the Proctor and Peikin lawsuits. The firm maintains it was “fraudulently” induced by Proctor President Mona Aboelnaga and other top Proctor officials to enter into investment contracts because the private equity firm misrepresented its ability to act as a marketing arm for Aletheia.

Proctor, in its own filings, said if it had known about Mr. Eichler's “penchant for dishonesty,” it would never have invested in Aletheia. It said Aletheia has refused to pay regular quarterly dividends to Proctor, which the firm was to receive in exchange for investing $16 million in Aletheia.

Proctor accuses Mr. Eichler of using company assets to fund “a lavish lifestyle,” including hiring private jets for non-business purposes.

Mr. Peikin in his court filings accuses Mr. Eichler of “looting” Aletheia and details the use of private jets by the CEO as well as hotel stays that cost up to $18,000 a night.

Aletheia, in the bankruptcy filings, says Mr. Peikin, a 25% owner of Aletheia, was fired because he failed to competently perform his executive roles.

Mr. Eichler has another version. In court papers associated with the bankruptcy filing, he blames Mr. Peikin for the firm's troubles. He says Mr. Peikin misappropriated Aletheia's assets, and his “incompetence and misconduct” resulted in millions of dollars in damage to Aletheia's business.

Mr. Peikin, in an interview with Pensions & Investments, blamed Aletheia's troubles on Mr. Eichler.

“I was the last check and balance,” Mr. Peikin said. “Since I have been gone, Mr. Eichler has been able to do whatever he wants with no internal control.”

Mr. Peikin called Mr. Eichler a “bully” whose motive was to oust him and Proctor so he could get control of the firm.

“It's very disappointing. Mr. Eichler has taken a once-thriving money management firm and run it into the ground,” Mr. Peikin said. “It's a shame.”

This article originally appeared in the November 26, 2012 print issue as, "Aletheia struggling to stay afloat".