John Orecchio, former co-owner and president of defunct private equity fund of funds AA Capital Partners, has been criminally charged by United States Attorney Patrick Fitzgerald with embezzling approximately $24 million from union pension plans.
Orecchio has been charged with one count of wire fraud and one count of embezzling funds owned by an employee pension benefit plan in a complaint filed by Fitzgerald, US Attorney for the Northern District of Illinois.
Orecchio is cooperating with authorities and is expected to eventually plead guilty, according to his attorney, William Ziegelmueller.
“Mr. Orecchio deeply regrets his past actions and has been working with various authorities to remedy his past actions,” Ziegelmueller said.
The US Securities and Exchange Commission filed a complaint against AA Capital and Orecchio in 2006 based on similar allegations.
Orecchio allegedly used money committed to AA Capital from the pension plans between 2002 and 2006 on personal expenditures. Allegedly, the firm would issue capital calls and Orecchio would divert the money for “his own use and benefit, resulting in losses totaling approximately $24 million”, according to a statement issued by the US Federal Bureau of Investigation.
AA Capital, formerly based in Detroit and Chicago, managed $169 million on behalf of its clients, which included several union pension funds located in Michigan, according to the FBI. The SEC complaint said AA Capital managed a total of $194 million.
The firm was formed in 1995 through a spinout from ABN AMRO’s Fund Investment Group. Orecchio joined the firm as a managing director in 2000 from Bank of America Capital Corporation.
Other professionals in the firm included Paul Oliver, who formed AA Capital in 1995 following the spin-out from ABN AMRO. Charles Wall was listed on the firm’s former website as a vice president in charge of portfolio analysis who joined in 2001 from BancAmerica Equity Partners, where he was chief financial officer.
The pensions allegedly defrauded are: Carpenters’ Pension Trust Fund, which committed about $75 million with the firm; Operating Engineers Local No. 324 Pension, which allocated $60 million; Michigan Teamsters Joint Council No. 43 Pension, which placed $100,000 with the firm; Millwrights’ Local No. 1102 Supplemental Pension, which committed $13 million; Michigan Regional Council of Carpenters Annuity Fund, which committed $21 million and the Arkansas/Oklahoma Regional Council of Carpenters, which gave $529,000 to the firm for investments.
AA Capital invested in numerous private equity firms, including Charterhouse Capital, ComVentures, De Novo Ventures, Evergreen, Gabriel Venture Partners, Green Equity Investors, Mission Ventures, Quantum Value Partners, Sterling Capital Partners, The Jordan Company and Veritas Capital, according to the AA Capital website, which is no longer live.
The firm made several direct investments, including a commitment to fund the development of a Hard Rock Hotel and Casino in Biloxi, Mississippi. The firm also backed a company called Music Affiliated, an independent Chicago music and merchandise company.
While the US Attorney’s complaint is light on details, the SEC complaint from 2006 lays out more lurid insight into the alleged scheme.
The SEC found AA Capital to be in “poor financial shape”, in 2006, with revenues for 2005 listed at about $2 million and expenses for the year totaling $7.1 million. The firm spent $4.4 million on salaries in 2005, with Orecchio collecting “at least $1.1 million in wages, tips or other compensation in 2005”, the SEC said.
Between 2004 and 2006, AA Capital and Orecchio allegedly misappropriated at least $10.7 million of its clients funds’, the SEC said. Specifically, between 2004 and 2005, AA Capital withdrew at least $5.7 million from client accounts and Orecchio allegedly directed the money into accounts for a horse farm in Michigan and a Detroit strip club, the SEC alleged. Neither business was related to investment advisory services AA Capital provided.
Also, the SEC found that in 2006, Orecchio submitted expense reimbursement requests to AA Capital for “hundreds of thousands of dollars for private plane rentals” and $120,000 to entertain clients at the Super Bowl. “AA Capital is unable to determine which of these expenses can be charged to its clients because it does not have current books and records for 2006”, the SEC said.
Orecchio faces a maximum of 20 years in prison and a $250,000 fine on the wire fraud charge, and a maximum penalty of five years in prison and a $250,000 fine for the embezzlement charge.