AA Capital Story Gets Stranger

The strange case of AA Capital Partners has gotten stranger – and this time it’s a limited partner that appears to be acting badly.

For those who don’t remember, AA is the Chicago-based private equity firm that last September was accused of misappropriating at least $10.7 million from its six union pension fund investors. Specifically, the SEC charged that AA managing partner John Orecchio withdrew client funds to invest in such things as horse farms and strip clubs, while also dropping thousands of client dollars on nights out in Las Vegas. Many of these expenses got passed on to LPs as “capital calls” – and at least some other AA Capital staffers allegedly looked the other way. Its so-called controller didn’t seem to be looking at all (maybe she borrowed some blinders from the horse farm).

Anyway, AA Capital has spent the past several months in receivership – as the legal proceedings lumber along. But then a funny thing happened: One of AA Capital’s limited partners sent out an RFP.doc to replace the AA Capital general partner. Specifically, it says: “The Michigan Regional Council of Carpenters Pension Fund-Detroit and Vicinity (Pension Fund) is in the process of selecting a replacement manager for Private Equity Fund of Funds managed by AA Capital Partners, who is currently in receivership.”

All well and good, except for one not-so-tiny problem: The Detroit Carpenters Pension Fund has no legitimate authority to select a replacement manager for AA Capital. Oops.

The union could obviously seek to sell its own limited partnership interests on the secondary market, but that’s not what it’s doing. Instead, it is purporting to speak for all – or at least a majority – of AA Capital’s limited partners. After all, one minority LP cannot unilaterally replace a general partner.

I spoke briefly yesterday with Scott Porterfield, an attorney who is serving as AA Capital’s receiver. He said that he was aware of the RFP, but that neither he nor the other LPs were part of the process. Moreover, he said that Detroit Carpenters Pension is – or should be – aware that any “selection” would have to be reviewed and ratified by the other LPs. In his words: “There is no formal agreement that we would accept any selection related to that RFP.”

But the tenuousness of this manager “selection” is completely absent from the RFP. As such, it makes the document misleading at best, and outright fraudulent at worst. Imagine responding to such an RFP, only to find out later that the issuer didn’t even have authority to make a final determination. Moreover, the document for some reason only covers AA Capital’s fund-of-fund commitments, without noting that there also is a portfolio of direct investments.

I have left multiple messages for the Smith Barney brokers who are listed as contacts on the RFP, but no word back as of yet. You can read the entire RFP here: RFP.doc