The SEC has filed for and received a restraining order against AA Capital Partners on charges that the firm and its president, John A. Orecchio, inappropriately took at least $10.7 million from its clients.

AA Capital is a Chicago-based investment adviser for six union pension funds with more than $194 million under management. The SEC’s restraining order prohibits AA Capital and Orecchio from further violations of the ’40 Act. It also freezes AA Capital and Orecchio’s assets, requires an accounting by both defendants, prohibits document destruction, and permits expedited discovery. The Commission has also appointed a receiver over AA.

According to the complaint, AA Capital typically invests client assets in several private equity funds managed by its affiliates. But the firm allegedly took a total of at least $5.7 million from client accounts over the course of more than 20 withdrawals, between May 2004 and October 2005. The SEC claims that it then deposited client assets into accounts Orecchio designated. The accounts were a motley bunch and included that of a Michigan horse farm owned by Orecchio, as well as one belonging to a company that manages a Detroit strip club.

To cover his tracks, Orecchio told AA Capital's chief financial officer that he made the withdrawals as a reimbursement for a miscalculation of taxes he owed. Those fictitious taxes involved at least one of AA Capital's affiliated private equity funds. In addition to his role as president, Orecchio, 40, owns half of AA capital.

In addition, AA Capital misappropriated at least $5 million of client assets to cover a shortfall between revenues and operating expenses, the SEC charges. The firm charges clients up to 2% to manage their assets. But that apparently wasn’t enough to keep the firm afloat. In 2005, it had more than $7 million in operating costs and just over $2 million in revenues, which prompted it to dip into client assets. Orecchio’s $1.1 million in annual compensation came out of the pilfered $5 million.

Furthermore, the firm perpetrated a fraud by telling clients that the withdrawals were "capital calls" on the clients' existing investments.

AA Capital's senior management knew of AA and Orecchio's misappropriations by early 2006. But they didn’t take steps to stop them continued to incur large expenses.

In 2006, Orecchio sought reimbursement for more than $4.3 million in travel and entertainment expenses in 2006. Those expenses included $1 million of political contributions, hundreds of thousands of dollars for private plane rentals, as well as $120,000 to take clients to the Super Bowl.

In addition, AA Capital paid out more than $2 million in 2006 to individuals designated by Orecchio. The payments were supposedly intended to cover travel and entertainment expense reimbursements. AA Capital had access to trust accounts that held more than $68 million in the form of cash, as of July 31, 2006.

According to the Commission’s complaint, neither Orecchio nor the firm has yet taken steps to pay back clients.

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