August 11, 2022

DealBook: S.E.C. Opens Inquiry Into Fletcher Fund

Alphonse Fletcher Jr. is chief of Fletcher Asset Management.Fred R. Conrad/The New York TimesAlphonse Fletcher Jr. runs Fletcher Asset Management.

8:47 p.m. | Updated

The Securities and Exchange Commission has opened an inquiry into Fletcher Asset Management, a New York hedge fund run by Alphonse Fletcher Jr., a prominent Wall Street investor, according to a person with direct knowledge of the situation.

The S.E.C. inquiry comes as three Louisiana public pension systems publicly raised questions about a Fletcher fund. The three pension systems said Tuesday that they were hiring a team of experts to examine the Fletcher fund’s financial records after it was unable to meet their requests to withdraw money from the fund earlier this year.

Mr. Fletcher, 45, drew headlines in February when he sued the famed Dakota apartment building on the West Side of Manhattan, accusing it and several of its board members of racial discrimination for denying his application to buy an apartment adjacent to his.

The Dakota is fighting the lawsuit and said that it rejected Mr. Fletcher’s application because it had serious concerns about his financial resources and suggested his investment firm “may be seriously troubled.”

Fletcher Asset Management says it has about $500 million under management. In 2008, it received about $100 million in investments from the Firefighters’ Retirement System of Louisiana, the Municipal Employees’ Retirement System of Louisiana and the New Orleans Firefighters’ Pension and Relief Fund.

In March, two of the pension systems asked to withdraw some money from the Fletcher fund, called the FIA Leveraged Fund. The FIA fund offered the pension systems a minimum return of 12 percent a year, which it delivered, as verified by two large accounting firms.

The FIA fund invests in mostly small, lightly traded public companies. The pension systems were allowed to earn a return in the range of 12 to 18 percent, they said in a statement. If the fund earned less than 12 percent, other investors, not the three pension systems, would absorb the losses. As a tradeoff, the pension systems’ agreed to forgo any return above 18 percent.

Mr. Fletcher told the Louisiana pension systems that it could not meet the redemption request because a forced immediate sale of assets in the present market environment would probably result in the fund obtaining less than a fair price on the assets in the capital markets, according to the pension systems’ statement.

Instead of redeeming the pension systems’ interest with cash, Mr. Fletcher issued a promissory note equal to the amount of each pension system’s redemption request. The note pays 5 percent interest and matures in two years.

“The distribution of a promissory note in lieu of immediate cash has raised concerns with the each of the system’s respective boards,” the pension systems said in their statement. “It gives rise to questions regarding the liquidity of the FIA fund and the accuracy of the financial statements issued by two renowned independent auditors.”

The pension systems’ statement came after their dispute with the fund was first reported by The Wall Street Journal.

Mr. Fletcher and his spokeswoman did not respond to requests for comment. The individual who disclosed the S.E.C. investigation did so on condition of anonymity because he was not authorized to discuss it publicly.

The Louisiana pension systems said they had notified Fletcher that they were assembling a team of accountants and consultants to examine its books.

The pension systems said that Mr. Fletcher had fully cooperated with their preliminary inquiries.

“However, if information is discovered that relates to FIA’s solvency or if Fletcher’s cooperation becomes less than forthcoming, then the retirement systems are poised to act quickly and decisively with any steps necessary to preserve the interests of the systems,” the statement said.

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