Discussion of Organizational Changes at Pacific Alternative Asset Management Company; and Possible Action (October 27, 2010, Regular Retirement Board Meeting)

CITY OF LOS ANGELES DEPARTMENT OF.WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE

Date: October 21,2010

To: Retirement Board Members

From: ~angeeta Bhatia, Retirement Plan Manager

Subject: Board Agenda Item NO.9: Discussion of Organizational Changes at Pacific Alternative Asset Management Company; and Possible Action (October 27, 2010, Regular Retirement Board Meeting)

The Board of Administration (Board) of the Water and Power Employees' Retirement Plan (Plan) hired Pacific Alternative Asset Management Company, LLC (PAAMCO) in December 2006 to manage a hedge fund of funds mandate for the Retirement Fund with an initial funding of $33 million in February 2007. As of September 2010, the market value of the account was $35.6 million. In August 2010, the Retirement Health Benefits Fund (RHBF) account was initially funded in the amount of $7.5 million, and as of September 2010, the market value of that account was $7.51 million.

At the Regular Board meeting held on October 13, 2010, Staff notified the Board of an organizational change involving the ownership structure of PAAMCO Founders, LLC (Founders). In summary, Donald Sussman is now entitled to convert his loan to the company into a 40% equity ownership in Founders. Also at this Board meeting, PAAMCO was placed on organizational watch because of the above-mentioned organizational change. The attached Board memorandum dated October 06,2010, and Resolution No. 11-25 contain the details.

As a result of the summary judgment in favor of Mr. Sussman's new stake in Founders, PAAMCO notified Staff on September 30, 2010, of a special redemption window to allow investors to partially or fully redeem their investment from the fund. PAAMCO's standard redemption policy only allows for quarterly redemptions with at least 90 days prior notice; however, PAAMCO is allowing its investors to redeem their investment as of December 31,2010, if noti'fied by October 27,2010. The Plan's accounts in both the Retirement Fund and RHBF will not be subject to any lock-up period if the Board chooses to redeem the Plan's funds.

Going forward, Pension Consulting Alliance (PCA) believes Mr. Sussman's permanent ownership stake that provides him with 40% of the net profits in Founders may impact PAAMCO's ability to attract and retain talented employees or partners in the firm because the Founders' compensation will be less than they anticipated; thus, they may not be able to provide desirable compensation to their prospective or current employees.

9.1 After further discussions with PAAMCO, PCA believes the change in the equity structure of Founders is significant, and therefore recommends termination of the Plan's contract with PAAMCO by fully redeeming the Plan's investments in the accounts managed my PAAMCO for the Retirement Fund and RHBF. PCA also recommends beginning the Request for Proposal process for a new hedge fund of funds manager to replace PAAMCO.

The following documents are attached:

• Resolution No. 11-33 • PAAMCO consent letter • Nossaman LLP memorandum on PAAMCO's consent letter • PCA recommendation to terminate PAAMCO • Board lVIemorandum dated October 6, 2010 • Resolution No. 11-25 (approved October 13, 2010)

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9.2 RESOLUTION NO. 11-33

RESOLUTION TO TERMINATE THE CONTRACT WITH PACIFIC ALTERNATIVE ASSET MANAGEMENT COMPANY, A HEDGE FUND OF FUNDS MANAGER

WHEREAS, the Board of Administration (Board) of the Water and Power Employees' Retirement Plan (Plan) hired Pacific Alternative Asset Management Company, LLC (PAAMCO) to manage a hedge fund of funds mandate for the Retirement Fund (RF) in February 2007 and for the Retiree Health Benefits Fund (RHBF) in August 2010, with an initial funding of $33.0 million and $7.5 million, respectively; and

WHEREAS, the market value of the PAAMCO account in the RF was $35.6 million, and $7.51 million in the RHBF, as of September 30,2010; and

WHEREAS, at the Regular Board meeting held on October 13, 2010, Staff notified the Board of an organizational change involving the ownership structure of PAAMCO Founders, LLC (Founders); and

WHEREAS, the new ownership structure of Founders entitled Donald Sussman, a passive investor in the company, to convert his loan to PAAMCO into a 40% equity ownership in Founders; and .

WHEREAS, at the Regular Board meeting held on October 13, 2010, the Board voted to place PAAMCO on organizational watch status for a period of six to twelve months due to the aforementioned organizational change; and

WHEREAS, PAAMCO, on September 30, 2010, notified Staff of a special redemption period allowing the Plan an opportunity to redeem all or part of its investments with PAAMCO, as of December 31, 2010, provided PAAMCO is notified by October 27, 2010; and

WHEREAS, Pension Consulting Alliance (PCA) believes the new ownership structure may impact PAAMCO's ability to attract and retain talented employees or partners; and

WHEREAS, PCA recommends terminating the contract with PAAMCO and fully redeeming the Plan's investments with PAAMCO in the RF and RHBF accounts and to begin the Request for Proposal process for a new hedge fund of funds manager to replace PAAMCO.

NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to terminate the Plan's contract with PAAMCO, to fully redeem the Plan's funds with PAAMCO in the RF and RHBF, and to begin a Request for Proposal process for a new hedge fund of funds manager.

I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 1102 (b) of the Los Angeles City Charter] at its regular meeting held on October 27,2010.

Sangeeta Bhatia Retirement Plan Manager 9.3 PACIFIC ALTERNATIVE ASSET Rt.I: MANAGEMENT COMPANY DU. Wl\r' September 30, 2010 10 OCT -4 [J12:35

Mr. Jeremy Wolfson Chief Investment Officer Los Angeles Department of Water & Power 111 NOlth Hope Street, Suite 357 ! Los Angeles, CA 90012 j Re: Pacific Hedged Strategies, LLC. I I \ Dear Jeremy,

We are writing to inform you of an event which indirectly involves Pacific Alternative Asset Management Company, LLC ("PAAMCO"). As you may know, the majority interest of PAAMCO is currently held by the four founding partners through an entity called PAAMCO Founders Co., LLC ("Founders"). Founders has had a dispute with Franklin Realty Co. and Franklin Realty Holdings, LLC (collectively, "Franklin") since March 2009, when Franklin filed a complaint against Founders alleging, in essence, that it is entitled to a 40% membership interest in Founders. Unfortunately, the court has decided the dispute in Franklin's favor and is expected to enter a final judgment in the near future.

Founders is reserving the right to appeal the court's final judgment. Regardless, we want to assure you that the outcome of the case, including any appeal, will not affect the management or operation ofPAAMCO.

In this regard, we want to clarify the following points for you:

• First, there will be no changes in the professional staff at PAAMCO or in the manner in which PAAMCO manages your investments as a result of this matter. PAAMCO's highest priority remains our clients and we are fully committed to continue carrying out our fiduciary responsibilities at the highest level possible.

• Second, Franklin would only obtain a membership interest in Founders, not PAAMCO. As is true today, Franklin will not have any direct interest in PAAMCO and will not have any direct influence over PAAMCO's management, operations or policies. Rather, PAAMCO will continue to be managed by the same four people who have managed PAAMCO since its inception - Jane Buchan, James Berens, William Knight and Judith Posnikoff (the "Founding Partners") - and by its Board of Directors, which is comprised ofPAAMCO's fourteen employee-owners.

• Third, specific to Founders, Founders' long-standing governance structure vests almost all decisions to be made by its Board of Managers, and Franklin will not have a seat on the Founders' Board of Managers. Indeed, Franklin will not even have a right to attend meetings of the Board of Managers or appoint or remove a member of the Board

19540 Jamboree Road, Suite 400 Tel: 949-261-4900 Irvine, CA 92612 Fax: 949-261-490]

DC-1474449 v3 9.4 Mr. Wolfson September 30, 20 I0

of Managers. As is the case now, Founders' Board of Managers will continue to be comprised solely of the Founding Partners.

• Finally, Founders' decisions that are not vested in the Board of Managers will be subject to a vote of the members of Founders, including Franklin. While this includes Franklin, such decisions will be effectively controlled by the Founding Partners given that together they control a super-majority (60%) of the membership interests in Founders. As a result, Franklin will have no effective ability to affect the management or policies of Founders.

Notwithstanding the above, the issuance to Franklin of the membership interest it seeks in Founders may teclmically be an "assigrunent" of PAAMCO's advisory agreements under the relatively complex relevant legal standards even though there is no direct change in the entity that is managing your money. Just to be clear, PAAMCO will continue to be the asset manager for your investments, and there is no anticipated change to PAAMCO, its employee-owners and its..continuing business plan.

However, if the issuance were to be deemed an "assignment," we would be required to obtain the consent of the members of Pacific Hedged Strategies, LLC (the "Fund") holding more than 50 percent of the capital account balances of all the members of the Fund, so we ask that you please provide your consent to such "assignment" as soon as possible by completing the attached and returning in the enclosed pre-addressed stamped envelope.

If after considering this information you would like to redeem from your investment, we are extending the notice date for a December 31,2010 redemption to October 27, 2010 and waiving any lock-up period that would apply to a December 31, 2010 redemption (redemption requests will be subject to the redemption terms and liquidity of the underlying investment funds and the Fund's usual redemption terms and conditions).

We will be updating our ADV and have attached a copy of Part 1 of the revised ADV that will be filed (you may also access the ADV via the SEC website). If you have any further questions about this matter, please do not hesitate to contact us as we would be happy to address them with you. We would also like to take this opportunity to thank you for your continued support of and confidence in PAAMCO.

Very truly yours, ~~~Director cc: Mr. David Sancewich, Pension Consulting Alliance Enclosures

2 9.5 Mr. Wolfson September 30, 2010

Pacific Hedged Strategies, LLC.

The undersigned hereby consents to such "assignment":

Los Angeles Department of Water & Power

By: ------Title: _

Date: ._------,-----

Please return in the enclosed envelope or to:

Investment Operations Pacific Alternative Asset Management Company, LLC 19540 Jamboree Road, Suite 400 Irvine, CA 92612

3 9.6 NOSSAMAN LLP MEMORANDUM

TO: Jeremy Wolfson Sangeeta Bhatia Scott Vargas Alan Manning, Esq. Alexander Lee

FROM: Nossaman LLP

DATE: October 18,2010

RE: Los Angeles Water and Power Employees' Retirement Plan/Retiree Health Benefits Fund - #290870-0004 Review of Solicitation Consent for Pacific Hedged Strategies, LLC

The Los Angeles Water and Power Employees' Retirement Plan ("LA Water and Power") and the Retiree Health Benefits Fund ("Health Benefits" and together with LA Water and Power, collectively the "WPERP") invested $40,500,000 in Pacific Hedge Strategies, LLC, a Delaware limited liability company ("Fund"). LA Water and Power invested $33,000,000 on January 31, 2007 and Health Benefits invested $7,500,000 on July 30, 2010. The Fund is managed by Pacific Alternative Asset Management Company, LLC ("Manager"). As part of the July 30th investment made by Health Benefits, the Manager, on behalf of the Fund, executed one side letter dated for both entities (which terminated and superseded the side letter for LA Water and Power dated January 31, 2007).

On September 30, 2010, the Manager sent Jeremy Wolfson a correspondence, together with a form of consent ("Consent"), requesting that the members of the Fund ("Members") approve an assignment of the Fund's advisory agreement ("Consent Solicitation"). According to the Manager, the Consent is necessary due to a recent court decision ordering Melissa Jane Buchan, James Lawrence Berens, William John Knight and Judith Fanny Posnikoff ("PAAMCO Founding Members") to issue Donald Sussman and his group of companies known as Franklin Realty Co. and Franklin Realty Holdings, LLC (collectively "Franklin") membership interest in PAAMCO Founders Co., LLC ("PAAMCO Founders Co."). The assignment of the advisory agreement needs approval of more than 50 percent of the capital account balances of all members of the Fund. This memorandum presents you with a brief summary of our findings regarding the Consent Solicitation.

Consent

Our general conclusion is that the Consent, as drafted, is suitable from a legal standpoint and may be executed as drafted but only if WPERP (a) determines that it does not object to the assignment of the advisory agreement and (b) elects not to exercise early redemption. However, it may not be necessary for WPERP to execute the Consent at this

9.7 time because the Manager has indicated that it has already received approval from 25 percent of the capital account balances of all members of the Fund and expects to reach 50 percent soon. Furthermore, in an email of October 15, 2010 addressed to Alexander Lee, Jim Berens and Dorothy Walsh (the "October 15th Email") indicated that there is no deadline for receipt of the executed Consent. Rather, although the Manager expects to reach over 50 percent it still would like to receive the executed Consents from all the Members for record keeping purposes. As such, there does not appear to be a pressing reason for WPERP to execute the Consent at this time. This is particularly the case if WPERP determines, based on recommendation from its consultant and approval from its Board, to exercise early redemption right.

Furthermore, please note that the Consent only refers to whether the Member approves the assignment of the advisory agreement. It does not contain any language with respect to a Member's redemption rights or the Manager's waiver of the lock-up period. Rather, the Consent Solicitation describes the purpose of the Consent and provides general statements about the early redemption process. As such, WPERP's right of early redemption does not appear to be conditioned on the execution of the Consent. The Manager also confirmed in the October 15 th Email that WPERP can exercise early redemption without executing the Consent as long as it does so by October 27,2010.

Redemption Rights

Section 6.6 of the First Amended and Restated Limited Liability Company Agreement of the Fund ("LPA") sets forth the Members' redemption rights. Pursuant to Section 6.6(a), the Fund must redeem all or part of the interest of any Member that requests the redemption by a notice to the Manager. The notice must be received at least 90 days (or another period in the Manager's discretion) before the Quarterly Valuation Date specified in the redemption request. Furthermore, according to Section 6.6(a), although a partial redemption may be requested, the amount of the remaining Member's capital account balance may not be lower than that specified in the Offering Memorandum (which is set at $5 million although the Manager in its discretion can waive this requirement). In accordance with Section 6.6(c) of the LPA, the redemption price for a voluntary redemption will be made by the Fund in cash or wire transfer to an account designated· by the Member within 30 days after the date that the redemption is effective or some other period determined by the Manager in its discretion. Furthermore, it is important to note that only 90% of the redemption price will be paid out by the Manager with the remaining amount paid within 90 days after the completion of an audit of the Fund's financial statements relating to the fiscal year in which such redemption occurred.

In addition, the Manager has the discretion to withhold from payment a reserve, in an amount determined by the Manager in good faith, to pay for contingent liabilities arising from events that occurred during the time such Member was an investor in the Fund and paid to the Member only when the Manager determines in its discretion that the amount in reserve is no longer needed to satisfy such contingent liability. Finally, the Manager has discretion as to which Fund investments will be sold to pay the redemption price for this purpose. The Manager is not liable for interest on any redemption price.

9.8 Lock-Up Period

A Member is prohibited from redeeming its interest unless it has been a Member for at least one year. This one year lock-up period may be waived by the Manager in its discretion. Once the redemption request is made, it cannot be revoked by the Member without the Manager's consent which may also be withheld in its discretion.

The lock-up period for LA Water and Power has already expired. In the October 15th Email, the Manager indicated that a lock-up period of one year would also not apply to Health Benefits although it made an investment of $7.5 million on July 30, 2010. According to the Manager, the one side letter of July 30th executed by WPERP appears to treat Health Benefits "as one investor" with LA Water and Power. This means that a lock-up would not be applied to Health Benefits by the Manager. With respect to partial redemptions, the Manager stated that although the Offering Memorandum provides for a minimum capital balance amount of $5 million, the Manager has discretion to waive this amount. Finally, the Manager made it clear that the early redemption opportunity must be acted upon by all Members by October 27, 2010. Otherwise, the Members would have to wait until the next Quarterly Valuation to make a redemption request. The Manager is also waiving any lock-up period that would apply to the December 31,2010 redemption to the October 27, 2010 redemption. All redemption requests will be subject to the redemption terms and liquidity of the underlying investment funds and the Fund's redemption procedures pursuant to the LPA.

Control of PAAMCO Founders

The court ruled that Franklin had a right to a 40% membership interest in PAAMCO Founders Co. The PAAMCO Founding Members will continue to collectively own a 60% supermajority of the membership interests in PAAMCO Founders Co. and also continue to be the "managers" of PAAMCO Founders Co. under the Amendment No. 1 to the Third Amended and Restated Operating Agreement of PAAMCO Founders Co., LLC ("Founders Operating Agreement"). Section 2.9 of the Founders Operating Agreement names the four PAAMCO Founding Members are "managers" of PAAMCO Founders Co. which is a manager managed limited liability company. As such, although the Founders Operating Agreement will need to be amended to reflect the issuance of a 40% membership interest to Franklin, under the Founders Operating Agreement, Franklin will be a "member" but not one of the "managers" of the company. Furthermore, under Section 5.1 of the Founders Operating Agreement, all decisions concerning the management of the company's business, including the day-to-day operations and specifically voting or taking other actions with respect to the membership interest in the company will be made only by the "managers." Franklin will not have voting rights despite a 40% membership interest in the company. Despite the safeguards for control of the company built into the Founders Operating Agreement, we are concern regarding the impact of a reduction in compensation to the PAAMCO Founding Members and other employees of the company as a result of having to share a significant portion of distributions with Franklin. Such reduction may impact morale and employee incentives to stay on long term.

9.9 Employment Agreements

According to the October 15 th Email, the PAAMCO Founding Members do not have, and have never had, employment agreements. According to the Manager, as a general practice, PAAMCO Founders Co. do not utilize employment agreements. Rather, Article X of the Founders Operating Agreement (as amended and restated in its entirely by the Amendment No. 1 dated July 1, 2010) provides for non-competition and non-solicit provisions applicable to the PAAMCO Founding Members. According to Section 10.1, if a PAAMCO Founding Member transfers its membership interest as a result of termination of his/her employment or resignation as an employee of PAAMCO Founders Co., such person cannot for a period of two years (i) compete (directly or indirectly) in any county in the State of California or any other state or country where PAAMCO Founders Co. or the Manager conduct business which is similar to or competitive with the business of PAAMCO Founders Co. or the Manager, (ii) solicit (directly or indirectly) any individual who is an employee of PAAMCO Founders Co. or the Manager, (iii) solicit (directly or indirectly) the business or any customers of PAAMCO Founders Co. or the Manager, or (iv) use or disclose in any matter "Confidential Information" (as defined in Section 10.2). Violation of Section 10.1 will result in a forfeiture of such person's right to payment under the Founders Operating Agreement.

Please do not hesitate to contact us with any questions or comments.

9.10 Date: October 27, 2010

To: Water & Power Employees Retirement Plan (WPERP)

From: Pension Consulting Alliance, Inc. (PCA) .' cc: Neil Rue - PCA ,...-"--:;<; ,_.....-1....- ...... ;::---- David Sancewich - PCA Kay Ceserani - PCA

RE: PAAMCO - Termination and Redemption Recommendation

Manager: Pacific Alternative Asset Management Company (PAAMCO)

Inception Date: 2/28/2007 Firm-wide AUM (6/30/10): $9.6 billion Investment Strategy: Fund of Hedge Funds WPERP AUM (6/30/10): $33 million Benchmark: Tbills + 3%

Recommendation:

As a result of a recent adverse ruling in a lawsuit against PAAMCO with a previous passive outside investor, and pending organizational changes, PCA recommends that WPERP redeem its entire investment in PAAMCO for both Retirement and Health Plan Assets. PCA also recommends that WPERP begin a formal RFP process to review the universe of Fund of Hedge Fund managers to replace PAAMCO.

Following a PCA memo dated October 13, 2010 and further discussions with WPERP Staff and PAAMCO, PCA believes PAAMCO's most recent organization changes will have a greater material impact upon the management of WPERP's fund of hedge funds portfolio than originally thought. Specifically, PAAMCO's four founding partners now managing WPERP's assets will likely be affected by the material loss of expected revenue and the subsequent addition of a prior passive investor, Donald Sussman, to PAAMCO Founders LLC. PAAMCO has also given no formal assurances that senior investment professionals will continue to remain with the organization long-term. In addition, the long-term ability of PAAMCO to retain and attract high quality investment professionals, due to the disruption of revenue and organizational changes, remains uncertain. As a result, PCA recommends WPERP begin a formal RFP process to review the universe of Fund of Hedge Fund managers to replace PAAMCO.

Summary:

In September 2010, PAAMCO announced to PCA and WPERP Staff that it had lost a lawsuit filed in New York court with an initial passive investor, Donald Sussman and his investment company Franklin Reality. The loss of the lawsuit allows Donald Sussman to become a 40% equity holder in PAAMCO Founders LLC, which is the holding company for PAAMCO's four founding partners. PCA believes this change has created a high level of organizational uncertainty and a distraction for PAAMCO's founding partners.

9.11 r------ I .~------WPERP retained PAAMCO's Fund of Hedge Funds product to manage roughly $33 million in February 2007. Since inception, the PAAMCO portfolio returned an annualized 2.1 %, trailing its benchmark target.

Discussion:

When PAAMCO was created in 2000, the four founding partners (Jane Buchan, James Beren, Judith Posnikoff, and Bill Knight), were extended a $2 million 10-year line of credit in order to create and support PAAMCO's business infrastructure. However, the four founders only drew $1.4 million on the 10-year line of credit. The line of credit was originally structured as a 10-year, interest bearing loan that PAAMCO could payoff after the end of the loan period. However in 2002, Donald Sussman (the provider of the credit line), sought to organize his affairs and formally created a loan document that included a clause that allowed payment in two methods, either (i) payment of the loan at 10% interest or 40% of PAAMCO revenue or (ii) a conversion to a 40% equity ownership in PAAMCO Founders LLC at the end of the 10-year period. As the end of the 10-year loan period neared, a lawsuit was filed by Donald Sussman (Franklin Reality) against PAAMCO in the state of New York to seek judgment on Donald Sussman's ability to convert his loan to equity ownership.

In September 2010, PAAMCO informed PCA and WPERP staff that they had lost the lawsuit and that Donald Sussman was allowed to convert his original loan agreement to a 40% equity holding position in PAAMCO Founders LLC, the holding company of the four founding partners. PAAMCO explained that this has no affect on PAAMCO LLC, which is the holding company for the rest of the PAAMCO organization.

PAAMCO has made it clear that Donald Sussman's equity ownership in PAAMCO Founders LLC is a passive position and that he has rio controlling interest.

Although currently there is no change to the Fund of Hedge Funds team servicing the WPERP portfolio, PCA finds these changes to be significant and believes it is appropriate for WPERP to redeem its investment in PAAMCO and conduct a search for a replacement Fund of Hedge Funds manager.

For the Year-to-Date, ending August 31, 2010 the PAAMCO portfolio returned 1.1 %, net of fees, trailing its benchmark's return of 2.1 %.

Additional Considerations th On October 13 , 2010, PCA recommended and the WPERP board approved that PAAMCO be placed on watch status for a period of six to twelve months. However, after further review and discussion with WPERP staff and PAAMCO, PCA feels that the long-term implications of Mr. Sussman and the subsequent loss of expected revenue will detract from the value of the WPERP portfolio. As a result, PCA recommends that the WPERP board redeem its investment in PAAMCO and submit a full early redemption request for both the retirement and health plan assets.

9.12 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE

Date: October 6, 2010

To: Retirement Board Members

From: C#Jsangeeta Bhatia Retirement Plan Manager

Subject: Board Agenda Item No. 11: Discussion of Organizational Change at PAAMCO; and Possible Action (October 13, 2010, Regular Board Meeting)

The Board of Administration (Board) of the Water and Power Employees' Retirement Plan (Plan) hired Pacific Alternative Asset Management Company, LLC (PAAMCO) in December 2006 to manage a hedge fund of funds mandate for the Retirement Fund with an initial funding of $33 million in February 2007. As of August 31, 2010, the market value of the account was $35.6 million. In August 2010, the Retiree Health Benefits Fund account was initially funded in the amount of $7.5 million.

On September 14, 2010, PAAMCO notified Staff of a court ruling against PAAMCO's Founders, .LLC (PAAI'v1CO Founders), a separate company that holds the four founding members' interests in PAAMCO. The ruling states that Donald Sussman, who, in 2000, provided PAAI\/ICO with a $2 million ten-year revolving loan facility to establish PAAMCO's business operations, is entitled to convert his loan into a 40% equity interest in PAAMCO Founders.

The original loan agreement entitled Mr. Sussman to receive, on a yearly ·basis, either 10% interest or 40% of adjusted net profits that flowed through PAAMCO Founders, whichever was greater, during the ten years the loan was in place. However in 2002, Mr. Sussman sought to clarify certain provisions in the loan agreement as well as include a provision that gave him the right to convert his loan to a 40% equity interest in PAAMCO Founders on or before the loan expiration.

With the loan set to expire in March 2010, Mr. Sussman invoked his right to convert his loan into equity. PAAMCO Founders challenged his right to receive an equity stake in the holding company. Subsequently, Mr. Sussman filed a complaint with the U.S. Southern District Court of New York seeking a ruling on the contested conversion right. As indicated above, the court ruled that Mr. Sussman did have the legal right to convert his loan into an equity ownership in PAAMCO Founders.

On September 16, 2010, Staff and PCA performed an onsite visit at PAAMCO's main office in Irvine, CA as part of the Plan's regular due diligence process and to obtain more information concerning the recent court ruling. During the meeting, PAAMCO disclosed that although, Mr. Sussman has a 40% equity interest, he will remain a passive minority investor and will continue to have no influence over the investment process or organizational management at PAAMCO. In conclusion, PAAMCO reiterated that business continuity will be the primary focus despite the recent ruling. f\lE COpy

9.13 Due to this significant change in the ownership structure of PMMCO Founders, and the potential organizational impact it may have on PMMCO, PCA recommends, and Staff concurs, that PMMCO be placed on organizational watch status for a period of six to twelve months. Staff and PCA will continue to closely monitor the account.

The following documents are attached:

• Resolution No. 11-25 • Memo from PCA , \ ~tNlt- lIi4/1;v for Jeremy Wolfson Chief Investment Officer

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f\\.E COP~

9.14 RESOLUTION NO. 11- 25

RESOLUTION TO PLACE PACIFIC ALTERNATIVE ASSET MANAGEMENT COMPANY (PAAMCO) ON WATCH STATUS

WHEREAS, the Board of Administration of the Water and Power Employees' Retirement Plan (Plan) hired Pacific Alternative Asset Management Company, LLC (PAAMCO) to manage a hedge fund of funds mandate for the Retirement Fund (RF) in February 2007 and for the Retiree Health Benefits Fund (RHBF) in August 2010, with an initial funding of $33.0 million and $7.5 million, respectively; and

WHEREAS, the market value of the PAAMCO account in the RF was $35.6 million and $7.5 million in the RHBF, as of August 31, 2010; and

WHEREAS, Donald Sussman, in 2000, provided PAAMCO Founders, LLC (PAAMCO Founders), a separate company that holds the four founding member's interests in PAAMCO, with a $2 million ten-year revolving loan facility to establish PAAMCO's business operations; and

WHEREAS, Mr. Sussman, in 2002, sought to clarify certain provIsions in the loan agreement as well as include a provision that gave him the right to convert his loan into a 40% equity interest in PAAMCO Founders on or before the loan agreement expired in 2010; and

WHEREAS, Mr. Sussman, in 2009, invoked his right to convert his loan into equity ownership in PAAMCO Founders, which they subsequently challenged; and

WHEREAS, Mr. Sussman filed a complaint with the United States Southern District Court of New York seeking a ruling on the contested conversion right; and

WHEREAS, on September 13, 2010, the United States Southern District Court of New York ruled that Mr. Sussman did have the legal right to convert his loan into a 40% equity interest in PAAMCO Founders; and

WHEREAS, PAAMCO notified Staff of the court ruling against PAAMCO Founders on September 14, 2010; and

WHEREAS, Pension Consulting Alliance (PCA) and Staff performed an onsite visit at PAAMCO's main office in Irvine, CA, on September 16, 2010, as part of the Plan's regular due diligence process and to obtain more information concerning the recent court ruling; and

WHEREAS, PAAMCO disclosed during the onsite visit that Mr. Sussman will remain a passive minority investor and will continue to have no influence over the investment process or organizational management at PAAMCO, despite his 40% equity interest in PAAMCO Founders; and FILE COpy

9.15 WHEREAS, representatives from PCA recommend, and Staff concurs, to place PAAMCO on watch status for the next six to twelve months due to a significant change in the ownership structure of PAAMCO Founders; and

NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to place PAAMCO on watch status for the next six to twelve months due to a significant organizational change, and to infor_m the manager accordingly.

f\lE COpy

9.16