SEC probes manager on diversion of $10.7 million

By Paul Merrion

CHICAGO — Court-appointed lawyers and forensic accountants are examining AA Capital Partners Inc. to determine how the small investment firm allegedly diverted more than $10.7 million from pension fund clients to cover its losses and support the firm's president and his outside business interests, including a Michigan horse farm and a strip club in Detroit, according to court documents.

After a nine-day audit in August, the Securities and Exchange Commission won a court order in September to appoint a receiver and freeze the assets of Chicago's AA Capital, which manages $194 million for six union pension funds, including $68 million in cash accounts under its control. Judge Robert Gettleman of U.S. District Court in Chicago set a status hearing on the receivership for Oct. 19.

"We thought it was important to act as quickly as possible," says John Sikora Jr., the SEC's assistant regional director in Chicago. "This scheme was jeopardizing the retirement funds of union workers." Court documents indicate most of the firm's pension fund clients are from the Detroit vicinity, with none from Illinois.

The rock ‘n' roll lifestyle of AA Capital co-owner John Orecchio, now suspended as president, was intertwined with the firm's disarray, according to the SEC.

An SEC complaint says the diverted pension money helped reimburse Mr. Orecchio for tax losses and $4.3 million in travel and entertainment expenses he submitted this year, which the SEC characterized as "extravagant." The agency detailed five-figure bills for Las Vegas nightclubs, private jets and thousands of dollars worth of entertainment, including $120,000 for Super Bowl tickets and $1 million in political contributions to Michigan Democratic Party organizations.

"I'm not providing any comments," says Mr. Orecchio, a former managing director at Bank America Capital Corp.

About $5 million of the pension fund money was used to cover the firm's operating deficit last year, the SEC charges. Another $5.7 million, disguised as "capital calls," was diverted to reimburse Mr. Orecchio or to support his interests in the horse farm and strip club, according to the SEC complaint.

Financial statements prepared by AA Capital say the firm had revenue of $2 million and almost $7.2 million in expenses last year. About $4.4 million was earmarked for salaries, including $1.1 million for Mr. Orecchio's wages.

"AA Capital is in extremely poor financial shape, with liabilities far exceeding its present assets," the SEC complaint alleges. "Rather than keeping track of individual client funds throughout the year, AA Capital commingles different clients' funds into one big pot to be sorted out at yearend."