Litigation Release No. 19826 / September 12, 2006

SEC v. AA Capital Partners, Inc. and John A. Orecchio, U.S.D.C. N.D. Ill., Civil Action Number 06 C 4859, filed September 8, 2006

On September 8, the Commission obtained a Temporary Restraining Order (Order) against defendants AA Capital Partners, Inc. (AA Capital), a Chicago-based investment adviser managing more than $194 million for six union pension funds, and its president, John A. Orecchio (Orecchio). The Order temporarily restrains AA Capital from violations of the antifraud and books and records provisions of the Investment Advisers Act of 1940 (Advisers Act), temporarily restrains Orecchio from aiding and abetting specific antifraud provisions of the Advisers Act, freezes the defendants' assets, requires defendants to give an accounting, prohibits document destruction, and permits expedited discovery. In addition, on September 12, the Commission obtained an order appointing a receiver over AA Capital.

In its complaint, which was filed on September 8, the Commission charged that AA Capital and Orecchio misappropriated at least $10.7 million from AA Capital's advisory clients. According to the complaint, AA Capital principally invests its clients' assets in several private equity funds managed by affiliates of AA Capital. The complaint alleges that, under Orecchio's direction, between May 2004 and October 2005, AA Capital withdrew at least $5.7 million from its client trust accounts in more than 20 separate installments and sent the client funds to various accounts Orecchio designated, including those of a Michigan horse farm owned by Orecchio and a company that manages a Detroit strip club. The complaint further alleges that Orecchio told AA Capital's CFO that the withdrawals were needed to reimburse him for what he claimed was a miscalculation of taxes he owed relating to at least one of AA Capital's affiliated private equity funds. The Commission's complaint also alleges that, during 2005, AA Capital misappropriated at least $5 million in client funds to cover the shortfall between its revenues and its operating expenses. The complaint further alleges that AA Capital misrepresented the nature of the withdrawals by sending monthly account statements to its advisory clients that falsely characterized the withdrawals as "capital calls" on the clients' existing investments.

According to the complaint, members of AA Capital's senior management knew of Orecchio's misappropriations and AA Capital's own misappropriations by early 2006, but continued to incur large expenses. The complaint alleged that Orecchio submitted more than $4.3 million in travel and entertainment expenses in 2006, including $1 million for political contributions, hundreds of thousands of dollars for private plane rentals, and $120,000 to entertain clients at the Super Bowl. The complaint further alleged that AA Capital had paid more than $2 million in 2006 to payees designated by Orecchio, purportedly in lieu of travel and entertainment expense reimbursement, including more than $1 million to the company managing the Detroit strip club and $610,000 to the Michigan horse farm. At the time the Court entered its Order, AA Capital had access to client trust accounts that held more than $68 million as of July 31, 2006.

The complaint alleged that, by the above conduct, AA Capital violated Sections 204, 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2(a)(1), 204-2(a)(2), 204-2(a)(6), and 206(4)-4 thereunder and that Orecchio aided and abetted AA Capital's violations of Sections 206(1) and 206(2). In addition to the relief already obtained, the Commission seeks the entry of orders preliminarily and permanently enjoining defendants from violations of the securities laws detailed above, as well as an order requiring defendants to disgorge ill-gotten gains and pay civil penalties.

SEC Complaint in this matter