SEC Ends PAAMCo Probe Without Charges

Pacific Alternative Asset Management Co. will not face a Securities and Exchange Commission enforcement action over its relationship with Paloma Partners' Donald Sussman.

(April 27, 2011) — The Securities and Exchange Commission (SEC) ended its investigation of Pacific Alternative Asset Management Co.(PAAMCo) and will not recommend enforcement action over its relationship with well-known hedge fund seeder Donald Sussman of Paloma Partners.

“We are grateful for all the expressions of support we received from our clients over these months,” PAAMCo CEO Jane Buchan told FINalternatives, describing the SEC’s decision as “good news” after the intense media scrutiny PAAMCo received following the court ruling.

Last October, the SEC’s New York regional office launched an investigation of the fund of hedge funds firm after Manhattan District Court Judge Richard Sullivan said, in an August ruling, that the firm’s arrangement with Sussman, who seeded PAAMCo with $2 million, “may have been designed to mislead a number of observers, from the tax authorities to the SEC to entities wishing to invest in women-owned businesses.” Funds that are majority-owned by women may have an easier time attracting capital from some institutional clients.

Following litigation between Sussman and the firm’s parent company, PAAMCo Founders, the judge granted Sussman a 40% stake in the holding company of the $9 billion firm for providing seed capital to the company’s four founders: Jane Buchan, James Berens, Judy Posnikoff, and William Knight. The stake allowed Sussman to convert the $2 million loan he gave the company a decade ago into an equity stake. Court documents asserted that one of the reasons for the convertible loan agreement was partly so that the manager would “qualify as a women-owned business and Sussman wouldn’t need to disclose an ownership interest.”

PAAMCo denied that it structured the fund to make it appear as though it was woman-owned in a front to lure investors.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742