Despite having “strong grounds on which to appeal,” executives at Pacific Alternative Asset Management Co. LLC will not appeal a ruling that awarded hedge fund manager S. Donald Sussman a 40% ownership stake in PAAMCO Founders Co.
Meanwhile, PAAMCO's clients continue to review their investments in light of the formal investigation of the firm by the New York office of the Securities and Exchange Commission (Pensions & Investments, Nov. 1). One fund, however, Merseyside Pension Fund, Liverpool, England, tripled its allocation to PAAMCO after its staff conducted a due diligence visit to the firm's Irvine, Calif., headquarters.
In a Nov. 5 letter to clients obtained by P&I, PAAMCO's four founders — Jane Buchan, Jim Berens, Bill Knight and Judy Posnikoff — wrote: “We, as well as our attorneys, strongly believe that the court's decision was flawed and that we have strong grounds on which to appeal. This belief, combined with our competitive spirit, would lead us to conclude that we should appeal. We have, however, decided not to appeal.”
The PAAMCO executives said they decided against contesting the Oct. 5 decision by U.S. District Court Judge Richard J. Sullivan in New York because Mr. Sussman's ownership stake, through Franklin Realty Holdings, does not give him any voting control or control over investment decisions of PAAMCO or PAAMCO Founders Co., where the four founding members have pooled their 75% voting interest and 65% economic interest in PAAMCO.
According to the client letter, “the process of further litigation would take a heavy toll, regardless of the outcome. If we were to go forward with an appeal, the initial appeal process would likely mean at least eight (to) 10 months of further legal work and litigation; a successful appeal would then result in a lengthy trial process, significant legal expense and periods of distraction for the founding partners. In addition, we are acutely aware that being right will not necessarily result in a favorable decision, as even the best judicial process is still fallible.”
Ms. Buchan, PAAMCO CEO, declined to comment.
In an expression of confidence in PAAMCO, after an in-depth due diligence visit to the company's headquarters, staff of the £4.6 billion ($7.4 billion) Merseyside Pension Fund agreed to not only triple the manager's hedge fund-of-funds portfolio assignment to £75 million, but also to go forward with a new consulting assignment for PAAMCO.
In June, PAAMCO was hired as a consultant to provide operational due diligence on the fund's direct investments in hedge funds, which total £100 million. But the appointment wasn't finalized until Paddy Dowdall, Merseyside's investment manager with responsibility for the hedge fund portfolio, made the trek to PAAMCO's southern California office in early November.
Mr. Dowdall said despite PAAMCO's new consulting role at the fund, there are no imminent plans to add more direct investments in hedge fund managers.
Other PAAMCO clients maintain increased monitoring of the firm, including the $220.1 billion California Public Employees' Retirement System and the $24 billion Pennsylvania State Employees' Retirement System.
Among boards of trustees that will be discussing their investment with PAAMCO is the Louisiana State Employees' Retirement System, Baton Rouge, which lists a PAAMCO update on its Nov. 18 investment committee meeting agenda. According to the Louisiana fund's website, PAAMCO managed $235 million in a hedge fund of funds as of Sept. 30.
Robert Beale, chief investment officer of the $7.6 billion fund, did not return calls seeking comment.
However, trustees of the Kansas City (Mo.) Public School Retirement System decided on Oct. 4 to terminate PAAMCO for management of an $18 million hedge fund-of-funds mandate, confirmed Thomas Mann, executive director of the $690 million fund.
According to the minutes of the Oct. 4 meeting, trustees discussed PAAMCO's legal situation before deciding to end the relationship with the firm. The board minutes said the assets will be transferred temporarily to an existing manager, index fund manager RhumbLine Advisers, until a new manager is selected.
PAAMCO's Ms. Buchan declined to comment on the fund's action.
Drew Carter contributed to this story.
