PAAMCo, a successful hedge fund manager that had long marketed itself as owned by women, notified clients by letter that it had become the subject of a formal investigation by the SEC.  Pacific Alternative Asset Management Company, didn't give reasons for the investigation, said Pension and Investments, which obtained a copy of the letter. The letter indicated, however, that the SEC’s interest stemmed from a recent ruling by a federal judge in New York that gave NY hedge fund investor Donald Sussman a 40% equity ownership stake in Paamco’s parent company. 

Over the years, Paamco marketed itself a firm majority-owned by women, and CEO Jane Buchan has become one of the most recognized females in the male-dominated hedge fund field.  But depositions from the 4 Paamco founders and documents in the lawsuit revealed that Paamco had been bankrolled by Mr. Sussman from its early days and that he had collected 40% of the firm’s profits over the years.

Mr. Sussman’s contribution to the firm was made as a loan, but it contained some unusual terms and conditions - e.g., he could collect 40% of the firm’s payments and that he could convert the loan into a 40% equity ownership stake in Paamco’s parent.  In his August ruling in the case, Judge Richard Sullivan said the arrangement “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.”

Pension and Investments reported that Paamco execs had told their clients they believed the Sussman transaction had been treated properly as debt for legal, marketing and regulatory purposes, based on advice of Paamco’s legal advisers and auditors.   [NYT Dealbook, 10/28]