The enforcement division of the SEC's New York regional office opened a formal investigation into Pacific Alternative Asset Management Co., according to a letter from PAAMCO to its clients that was obtained by Pensions & Investments.
The reason for the investigation was not disclosed, but PAAMCO officials indicated in the Oct. 25 letter that the SEC's interest stems from an Oct. 5 ruling in U.S. District Court in New York that granted hedge fund manager S. Donald Sussman a 40% ownership equity stake of PAAMCO Founders through his company Franklin Realty Holdings. PAAMCO Founders is a group of the four founding partners of the firm who own a 75% voting interest and 65% economic interest in the investment manager, Pacific Alternative Asset Management.
Judge Richard J. Sullivan ruled that a verbal agreement made between the four founders and Mr. Sussman in 2000 gave Mr. Sussman the ownership stake in exchange for providing startup money for PAAMCO. PAAMCO executives maintain that the seed money Mr. Sussman provided was a loan, according to the client letter.
PAAMCO is cooperating fully with the SEC's requests for information, said Jane Buchan, CEO of the hedge fund-of-funds manager, which runs about $9.7 billion in discretionary assets for institutional investors.
According to the PAAMCO client letter, executives of the firm “determined it was important to proactively reach out to the SEC about the decision.” They met with the SEC's Los Angeles regional office (the office responsible for oversight of PAAMCO) in September and “answered all of their questions about the case.”
PAAMCO executives expressed confidence in the letter that “we have consistently and properly treated the Franklin transaction as debt for legal, regulatory, tax and marketing purposes based on the advice of Founders' legal advisors (including the law firm K&L Gates LLP) and auditors.”
Kevin Callaghan, a spokesman in the SEC's New York regional office, declined to comment, noting that it is the agency's policy not to confirm or deny the existence of active investigations.
Michelle Lane, a spokeswoman for the SEC's Los Angeles regional office, did not return a call.