Fund of funds snared in theft charge

AA Capital, a Chicago and Detroit fund of funds manager that spun out of ABN AMRO in 1995, has been hit with an SEC restraining order pending an investigation into charges that the firm stole at least $10.7m from labour-union LPs. The firm has ties to eleven well known private equity firms, as well as to a Detroit strip club and the rap producer Shorty Capone.

The Securities and Exchange Commission yesterday unveiled charges against AA Capital Partners, a Chicago- and Detroit-based fund of funds that has been charged with misappropriating funds from clients.

AA Capital was formed in 1995 through a spinout from ABN AMRO’s Fund Investment Group. According to the SEC enforcement action announcement, the firm manages roughly $194 million (€153 million) on behalf of Taft-Hartley plans – pension plans sponsored by labour unions.

According to a statement from the SEC, a complaint filed against AA Capital and its president, John Orecchio, alleges that the firm and its president misappropriated at least $10.7 million from clients through a series of false capital calls and expense claims.

A call to AA Capital in Chicago was not answered. A call to the firm’s Detroit office led to a disconnected number.

The fund of funds manager has commitments with 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.

The firm has also made a number of direct investments, including a commitment to fund the development of a Hard Rock Hotel and Casino in Biloxi, Mississippi, according to the firm’s website.

Shorty Capone: owner of Music Affiliated, an AA Capital investment

AA Capital has also backed a company called Music Affiliated, an independent Chicago music and merchandise company. A January, 2005 article in Crain’s Chicago Business describes Music Affiliated as led by Terrell Harris, aka Shorty Capone, a rap producer. The partnership was meant to promote Chicago rappers Reggie Ruckus and Sosa Q’uran. Orecchio was quoted in the report as saying: “If you look at Shorty’s track record. . .  there’s a lot of upside.” AA Capital reportedly invested $1 million in Music Affiliated.

According to the complaint, between May 2004 and October 2005, the firm, “under Orecchio’s direction”, withdrew at least $5.7 million from client accounts and diverted the money to accounts designated by Orecchio, including to a “horse farm owned by Orecchio and a company that manages a Detroit strip club”.

Orecchio told his chief financial officer that the withdrawals were needed to cover at least one tax discrepancy of one of the firm’s underlying private equity funds, according to the complaint.

During 2005, AA Capital also represented withdrawals from client accounts as capital calls, even though the money was used to cover operating budget shortfalls, according to the complaint.

Senior management executives knew of Orecchio’s and the firm’s misappropriations, according to the complaint.

The complaint also alleges that Orecchio spent lavishly on travel and entertainment, including $1 million for “political contributions”, hundreds of thousands of dollars on private plane rentals, and $120,000 at the Super Bowl.

The SEC has issued an emergency temporary restraining order on AA Capital, which freezes the defendant’s assets. When the order was put into effect on September 8, client accounts held roughly $68 million. On September 12, the SEC also obtained an order appointing a receiver over AA Capital.

AA Capital’s website lists Orecchio as a managing director who joined the firm in 2000 from Bank of America Capital Corporation. The other two senior professionals listed are Paul Oliver, who formed the group in 1995 following the spin-out from ABN AMRO. Charles Wall is listed as a vice president in charge of portfolio analysis who joined in 2001 from BancAmerica Equity Partners, where he was CFO.

According to a prior press report, among AA Capital’s limited partners is the Detroit Police and Fire Retirement System, which committed $20 million to the AA Capital Partners Alternative Asset Fund.

A June 2006 issue of Money Management Letter reported that AA Capital Partners was in the process of raising an opportunistic real estate fund targeting Taft-Hartley plans as limited partners. The fund had a reported target of $350 million.

Labour unions have been slow to get involved in the private equity asset class, in part because of the perception that private equity is not “labour friendly”.