Irving H. Picard v. Saul B. Katz et al

Filing 170

DECLARATION of Regina Griffin Completed With Exhibits 31 to 45 in Support re: 162 FIFTH MOTION in Limine To Deem Statements By Sterling Stamos Employees In The Course Of And In Connection With Their Employment By Sterling Stamos As Admissions of The Sterling Defendants.. Document filed by Irving H. Picard. (Attachments: # 1 Exhibit 31, # 2 Exhibit 32, # 3 Exhibit 33, # 4 Exhibit 34, # 5 Exhibit 35, # 6 Exhibit 36, # 7 Exhibit 37, # 8 Exhibit 38, # 9 Exhibit 39, # 10 Exhibit 40, # 11 Exhibit 41, # 12 Exhibit 42, # 13 Exhibit 43, # 14 Exhibit 44, # 15 Exhibit 45)(Sheehan, David)

Exhibit 34

From:
Sent:
To:

Subject:

Kevin Okimoto
Friday, April 23, 2004 3:34:08 PM
[e-mail]
Ted Conrads; Ashok Chachra
Due Diligence draft - Confidential

Attachments:

Due Diligence Overview.pdf; Ueda Due Diligence DRAFT.doc

CC:

Roger:

It was nice speaking with you today. As promised, attached please find a draft of the due diligence guide
we have created for our Security Fund. In addition, I have attached a draft of the Ueda outline
addressing some of the issues raised in their due diligence document. Please note that the attached
documents are very rough and have not been finalized.

Best regards,

Kevin

CONFIDENTIAL

SSMT02257869
SSMSAA2257869

STERLING STAMOS
Due DiUgence Guide (Draft)
Security Fund
April2004

SterIngStamos
CONFIDENTIAL

SSMT02257870
SS M SAA22 57870

Contents
Ffrm Background

Asset Base Characterìstks

SubAdvsors
Fund.ot.Firnds Manager
nvestrnent Strategy

a Lega/Regfflatory
Operations & Client Servke

'This document does not constitute an offer to seIt, or a solicitation of ars offer to huy the limited parosership interests described herein. No such offer
or soliciration wiii be triade ptior to the delivery of a definitive offering memoranditits and other materials relating to the rriattecs herein. Before
making an investment decision with respect to the partnership, potential investors are advised to read careiully the offerurigsnemorandusn, tise limited
partnership agreement and the related subscnption documents, and to consult with their tax, legal, and financial advisors.

This document contains a preliminary summary of the pufposr and principal business terms of the partnership; this summary does not purport to be
conipkte and is qualified in its entirety by reference to tise mote detailed discussion contained in the private offering memorandum and the actual text
of the limited partnership agreement. The General Partner has the ability us its sole discretion to change the strategy descthed herein.
This document is being provided to you on a confidential basta solely to assist you iii deciding whether or flot to proceed with a further investigation
ofan investment in Sterling Starnos. Accordingly, this document may not be reproduced in whole orto part, and may not be delivered to any person
without prior written consent of Sterling Stainos, 575 Filhit Avenue - 40th fI., New York, NY 10017, [phone]

2

CONFIDENTIAL

SSMT02257871

SSMSAA2257871

Due Diligence Guide

Name of Firm

Securiti Fund

Sterling Stismos

What year was the firm founded?

The firm was founded in July 2002 and officially opened
to the public in October 2002.

Who are the key principals, their year of
affiliation, and responsibilities?

Name

Year

Responsibilities

Peter S. Stamos

2002

CEO & Managing Partner

Saul B. Katz

2002

Partner

David Katz

2002

Partner

Spiro Stainos

2002

Partner

Chris Stamos

2004

Panner, COO

Kevin Barcelona

2004

Partner, CFO

Ellen Horing

Partner, Portfolio Advisor

2002

Partner, Portfolio Manager

Kevin Okimoto

2002

Partner, Front Office Manager

Scott Whitcher

Describe the ownership structure of the firm.

2002

Ashok Chachra

2004

Partner, Investor Relations

Ownership Structure

Ownership %

Sterling Partners

50%

Stainos Partners

50%

What percentage of the key principals' liquid
net worth is invested in the fund?

Approximately 20% of the key principals' liquid net worth
is invested in the Partnership.

Please provide the current number of
employees in each of the following
categories. Each employee should only be
counted in their primary role for the purposes
herein. Please indicate whether there are any
employees that serve multiple roles and
under what circumstances.

Total # of Employees

23

Portfolio Managers

3

Where are your principal offices? Are there
branch offices? Please list the number of
employees at each site.

Research Analysts

Operations

11

Other

4

lDffice Type

anoti

-Employees

8.

New York, NY

21

Branch

What are the other areas of business that
Sterling Equities is involved with?

Principal

Menlo Park, CA

-t-

2

Sterling Equities

Real Estate Development

Sterling American
Properties

Real Estate Funds

American Securities
Capital Partners

Private Equity Funds

New York Mets and
Brooklyn Cyclones

Sports and Entertainnsent

3

CONFIDENTIAL

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Due Diligence Guide

Security Fund

ni
See attached sample

I

What benchmark is appropriate for your fund
and why?

2.

Please describe your risk and reward
objectives?

3.

How does the fund differentiate itself from

others in the strategy?

4.

How are asset allocation decisions made?

mw..

The most appropriate benchmark to monitor the
performance of the Partnership is the HFRI Fund-ofFunds Conservative Index ("HFRI POF: Conservative
Index"). 'Ibis index is used due to its emphasis on
conservative hedge fund strategies that seek to generate
consistent returns regardless of equity or fixed income
market conditions. Primary sub-strategies include market
neutral, fixed income arbitrage, convertible arbitrage, and
other conservative absolute return strategies.
Target Return

8-12%

Target Standard Deviation

2-4%

The Partnership seeks to differentiate itself from other fund
of funds by combining top-down macroeconomic analysis
with the ability to select and gain access to "best-in-dass"
managers within each target market segment. In addition,
the Partnership has the unique ability to reserve capacity in
dosed fund managers and vsll not uwest unless the
underlying hind managers provide a reasonable level of
transparency.
i Macro
Economic
Analysis

2 Sector
Analysis

3 Sourcing

4 Risk!
I'ortfolio
Management
5

Investment
Allocation

Identify key macroeconomic trends
based upon fundamental analysis,
technical analysis, and liquidity
trends.
Determine portfolio concentrations
to specific hedge hind strategies
based on macroeconomic
opportunity set and risk analysis.
Identify "best-in-class" fund
managers and garn access and
capacity with "closed" fund
managers.
Assess portfolio exposure limits by
sector, strategy, and fund manager.

Finalize allocation to each strategy,
sub-strategy, and manager. All
allocation decisions are made by
consensus, with Peter Stamos as the
final decision maker.

5.

How many analysts do you employ?

There are currently a total of 5 research analysts md 3
portfolio managers responsible for souttisig, due diligence,
and monitoring managers.

6.

What is the ratio of sub advisors to analysts?

5-to-i

4

CONFIDENTIAL

SSMT02257873

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Security Fund

Due Diligence Guide

How often do you rebalance?
Describe your due diligence resources and
process?

The portfolio is rebalanced on a monthly basis.
i

Sourcing

The following resources are used to
gather information in the due
diligence process: personal and firm
networks, industry newspapers and
events, investment hank prime
brokerage contacts, public databases,
private databases, existing managers,
and current investors.

2

Analytics

Pnor (o an initial meeting with a
prospective fund manager, the due
diligence prucess starts by gathering
information on the fund-specific
strategy, including monthly retunis,
performance attribution, legal
documents, audited financials, proof
of experience, and references for
each manager. Performance,
liquidity, and correlations between
proposed fund managers and existing
fund managers us the portfolio are
analyzed to identify whether or not
follow-up interviews should be
scheduled.

3

Interviews

I'hone interviews and on-site visiti
are used to garn an understanding of
strategy infonnation such as
investment idea generation,
philosophy of investing, investment
strategy outlook, portfolio
construction, differentiating factors
from peer group, position-level data,
decision-making rules, execution
process of trades, quality of team
members, portfolio pncing, risk
management procedures, etc.

4

Operatioiial/
Business Due

Significant emphasis is placed on
operational due diligence, which
indudes infrastructure quality, risk
management protocol, compensation
structure, manageable AUM size,
portfolio liquidity, reference checks,
prime brokerage relationships, credit
lines, etc.

Diligence

5

Monitoring

The asset class and strategy
associated with the underlying fund
manager is monitored on an on-going
basis to determine market
opportututies and key events.
Weekly NAV's from fund managers
are compared with the performance
of associated market/asset class to
monitor their performance against
the opportunity set. Regression
analysis estimates style drift and
5

CONFIDENTIAL

SSMT02257874

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Due Diligence Guide

Secunty Fund

Value-ar-Risk on both the portfolio
and manager level.

What are your minimum transparency
requirements necessary for a manager to
receive an investment from you?

In order for managers to receive an ulvestinent, they must
provide the following information: identification on a
monthly basis of top 5 largest risk positions, monthly core
investment themes, monthly written and/or oral dialogue,
monthly and/or weekly performance information.

What is the minimum length of track record
necessary for a manager to receive an
investment from you?

There is no specific minimum track recot for a manager to
receive an investment from the Partnership. However, a
manager must have a multi-year personal track record at a
reputable institution (buy side, hedge fond, investment
bank) if they arc starting their own investment vehicle.

Please describe the strengths and risks of
your strategy, including a market description
of conditions that you would consider to be
advantageous/disadvantageous for this
strategy.

'I'he strategy and Partnership performs well in markets that
are trending markets within a range, either up or down,
willi historical movements in volatility. Markets that are
flat or excessively volatile are not advantageous for the
Partnership. I'he major nsks to the portfolio and strategy
include a liquidity crisis, a major geopolitical event, a rapid
decline in interest rates, and a rapid widening of credit
spreads.

-'C

11.

-

Does the fund have a high water mark?

Yes

Does the fund have a hurdle rate?

Yes, 5%

14.

On average, how many separate funds do
you invest in?

On average, the Partnership invests in approximately 30
different managers.

15.

Do you avoid any sectors and!or strategies?

The Partnership generally avoids CTAs and pure short
sellers. In addition, the Partnership limits its exposure to
mortgage backed arbitrage fonds, and sector-based
long/short equity funds in binary outcome industries (e.g.
biotech and technology).

16.

What has the turnover been of managers in
the fund over the previous 5 years?

'hie approximate turnover in managers in the portfolio is

17.

How are investment decision made?

The Portfolio l'eam, led by Ashok Chachra, develops
strategy, sub-strategy, and manager allocation
recommendations. The team is responsible for portfolio
construction, risk management, and the due diligence
process. Investment decisions are made by team
consensus, with Peter S. Stamos holding final decisionmaking authority. An informal investment committee
meets quarterly to discuss the market environment and
portfolio allocations.

18.

Please provide an example of what you
consider to be one of your better investment
decisions and how the investment was
realized.

One of the better investment decisions in the portfolio was
the allocation to credit related strategies. In late 2002, post
the WorldCom, Enron, and Adelphia scandals, credit
spreads had reached historically wide levels. The macro
perspective of the Finn was that there were opportunities
to capitalize on the excessive selling in tise high yield and
distressed market, The decision was made to invest in
credit strategies that were well positioned to capitalize on
the tightening of credit spreads, while having the ability to
short credit when appropriate. During the same time
period of October 2002 to December 2003, credit spreads
between Single B toted industrial bonds and the 10-year

10%

6

CONFIDENTIAL

SSMT02257875

SSMSAA2257875

Due Diligence Guide

Security Fund

Treasury tightened from a high of 878 to 405 basis points.
As a result, the two managers that were included in the
portfolio were two of the best performing managers us the
portfolio for the year.
Please provide an example of what you
consider to be one of your weaker investment
decisions and how the investment was
exited.

One of the weaker investment decisions was made in a
long/short equity manager that had an extensive 10-year
track record of strong performance. The investment fund,
which caine highly recommended by dose advisors, made
off balance sheet loans to a private, self-affiliated, entity
that was not disclosed in any of its position-level data,
quarterly letters, or SEC filings. The comptiny eventually
went bankrupt and was unable to pay back the loan. As a
result, the fund was forced to liquidate its portfolio aiid
return the limited partners' capital.

How do you identify and quantify risk?

Risk is monitored through qualitative asid quantitative
analysis. The majo r qualitative risk (business and
operational risk) is identified through numerous face-toface due diligence interviews with fund managers and
through reference checks with the brokerdealer
community and other industry specialists.

Quantitative nsk is analyzed through several internal risk
management procedures. Style analysis is used as a
preliminary indicator to determine a single manager's
investment strategy. Extensive Value-at-Risk (VaR) analysis
is performed to estimate material losses to the portfolio
during rimes of extreme market dislocation. VaR is
currently calculated using bootstrapping, parametric
distributions, extreme value modeling, style-based return
analysis, and Monte Carlo simulation. Sterling Sramos is in
the process of developing asset based return analysis that
will also generate a VaR estimate for the portfolio.
Modeling artificially high correlations between the
managers, as well as assuming unusually high variance in
the returns of the portfolio managers also serve to Stress
the portfolio. Finally, Sterling Stamos is developing models
that identifi,' autocorrelation in the historical returns of
managers to better understand liquidity risks that may go
undetected by tmditional risk measurement methods.
1 How do you manage and control risk?

Risk is managed through diversification across strategy,
sub-strategy, and fund manager. In addition, risk is
managed through close monito ring of managers and peer
group analysis.

How quickly and by what methods do you
deploy capital additions?

Initial investment allocations are typically a fraction of our
expected long-term position size. Average initial
investments are made around 1% of the portfolio and can
grow up to 100/i. Position sizes ar increased or decreased
depending on market opportunities, comfort level with
managers, and overall strategy allocation limits.

Does the fund employ leverage?

No

What are the limitations on your use of
leverage?

Not Applicable

What are your concentration limitations?

Concentration

Lilnitations

Single Manager Allocation

10%

7

CONFIDENTIAL

SSMT02257876

SSMSAA2257876

Security Fund

Due Diligence Guide

Strategy Allocation

15%

Sector Allocation

NA

Net Market Exposure

Range: (10%) - 40%

Discuss diversification of sub advisors?

Diversification is a key component in the portfolio
construction process. The portfolio is diversified across
strategy, sub-strategy, and managers. The average position
size is 3.1% and the largest position is 8.5%

Discuss correlation of sub advisors to each
other and to market indices?

Correlation of managers within the portfolio and against
each benchmark asset class is monitored on a monthly
basis.

IIÍtij

1f

Is your firm or any affiliate involved with its
hedge fund business a Registered
Investment Advisor? If an affiliate is a
Registered Investment Advisor, please give
the name of the affiliate.

3.

Sterling Stamos is not affiliated with a broker/dealer.

Is your firm or any affiliate involved with your
hedge fund business registered with any
other regulatory agencies or a member of any
other self-regulatory organization?

I

Sterling Stasnos is currently in the process of becoming a
Registered Investment Advisor. The Finn intends to
complete the registration process by the end of the Second
Quarter of 2004.

Is your firm affiliated with a brokerldealer? If
so what is the name of the brokerldealer and
is it a member of the NASD? Describe the
nature of your firms relationship with the
broker/dealer.

1.

2.

tots
080

Sterling Stasnos is not registered with any regulatory
agencies. The General Partner and Management Company
are exempt from registration as a Commodity Pool

Operator with the Commodity Futures Trading
Commission under Rule 4.13(a) 3 and 4.13(a) 4.

Please describe any litigation, complaints,
arbitration, regulatory action, or dispute
involving your firm or its employees in the
past 5 years, irrespective of whether involved
parties are stili employed by your firm or not.
Include the nature of the action and its
-outcome if resolved.

Neither Sterling Stamos nor its employees have been
involved with litigation, complaints, arbitrage, regulatory
action, or disputes in the past 5 years.

5.

Describe any significant outside activities,
including associated time commitments of
each of the principals to any outside funds.

Ellen Horing, Senior Portfolio Advisor and Partner,
separately managers her own fund-of--funds product on
behalf of her family.

6.

Briefly describe any past, current, pending or
threatened litigation (including, but not
limited to, any SEC or other regulatory
investigations, audits, or consent decrees),
which involves any of the key individuals of
i the General Partner, the General Partner
itself, or any affiliated entities.

4.

7.
i

Have any of the key individuals, the General
Partner, or any affiliated entities ever (i) filed
for bankruptcy or (ii) had any judgments
entered against them? If yes, please describe
the circumstances. Also describe

There is no current, pending, or threatened litigation
involving key members of the General Paimer, the General
Partner itself, or any affiliated entities.

No

settlements or expiration of lal actions

8

CONFIDENTIAL

SSMT02257877

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Due Diligence Guide

Security Fund

commenced involving the General Partner,
individual Generai Partners, or any affiliate&

Identify and discuss potential conflicts of
interest that may arise among the various
individuals and organizations comprising the
General Partner or any affiliated entities.

List any additions and departures to
Iprofessional staff during the past five years.
Please provide contact information for all
departures: name, position, start date,
termination date, and reason for departures

Certain inherent conflicts of interest may anse fiom the fact
that the General Partner and the Management Company
provide investment management and other services to
other investment Partnerships operated by the Firm. In
addition, Ellen Honng provides investment management
services to her own fund of funds. Suds other accouists
may have investments with certain Portfolio Managers
utilized by the Partnership. To the extent that such
Portfolio Managers limit the amount of assets and accounts
that they will manage, Sterling Stamos may be required to
choose between the Partnership and such other clients in
allocating assets to such Portfolio Managers. In addition,
one or more of the Portfolio Managers may be affiliated
with the General Partner.

Derek S. Daley (January 2003 October 2003) Position:
General Counsel, Partner. Reason for departure: Pursue
personal interests outside of the Firm.
Tom Olds (June 2002 - Auges t 2002) Position: Manager.
Reason for departure: Pursue personal interests outside of
the Firm.

Noreen Harrington (October 2002 July 2003). Position:
Chief Investment Officer. Reason for departure: l'ursue
personal interests outside of the Firm.
Contact information available upon request.
10

Does the firm carry Errors & Omissions
(E&O) insurance and in what amounts and
with whom?

No

1.

Who acts as the custodian for the assets?

Citibank rnalntanis the assets held by the partnership prior
to an investment with an underlying fund manager. The
custodian for each underlying fond massager holds actual
securities.

Do you have an administrator? If so, who?

RK Consulting, ¡J.C, a Delaware limited liability company,
serves as the Partnerships administrator under the overall
direction of the General Partner. As Administrator, RK
Consulting LLC performs certain administrative tasks on
behalf of the Partnership, including (i) accounting (ii)
maintenance of the Partnership's books and records, (ìii)
proccs'sing subscription applications, (iv) ensuring
appropriate documentation has been provided by investors
in comphance with anti-money laundering regulations, (y)
preparation of reports and accounts, (vi) calculation of
estimajed net asset value and fees, and (vii) issuance of
communications with limited partners.

Does the administrator calculate the NAV?

Yes, the independent administrator calculates the final
capital account balances for the Partnership and each
limited partner on a monthly basis

9

CONFIDENTIAL

SSMT02257878

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Due Diligence Guide

Security Fund

Does an outside firm audit the financial
statements of the Fund? If so, what is the
name of the auditing lirm, and when did this
relationship begin? Is the auditor's opinion
unqualified?

Please describe your disaster recovery plan.

6.

The Partnership retained Ernst & Young LLP as its
independent auditors since inception of the firm. Limited
Partners will receive annusi audited financial reports
audited by the Partnership's independent public
accountants, typically withm 120 days after the end of the
fiscal year. The auditor's opinion for 2002 was qualified; it
has riot yet been determined, however, whether or not the
opinion for 2003 will be qualified or unqualified.
The disaster recovery plan is designed to sustain and
recover highly critical books and records of the Partnership.
All books and records of the Partnership are held at the
pnncipal place of business in New York, as vell as with the
Partnership's outside administrator. The computer
network has been structured with redundant architecture
ftr all servers and power supplies, all of which is held at an
113M facility in the Tn-State Area. In addition, all data are
backed up on a nightly basis on magnetic tapes, which are
then stored with Iron Mountain, outside the Tn-state area.

Do you provide clients with:

No

Quarterly letters

Yes

Quarterly con ference calls

No

Annual partners meeting

Yes

Access to information by website
Please provide most recent example of above

Yes

Monthly commentaries

7.

Monthly performance statements

Target- 2004

See attachments

lo

CONFIDENTIAL

SSMT02257879

SSMSAA2257879

SP Capital Security Fund

Year to Date
Highest 12 Month Return
Lowest 12 Month Return
Average Annual Return
Highest Monthly Return
Lowest Monthly Return
Average Monthly Gain
Average Monthly Loss
Profitable Percentage
Compounded Monthly Return
Losing Streak
Maximum Drawdown

2 25%
10. 82%

8.37%
9.60%
1.77%
-0.44%
0.92%
-0.31%
88.24%
0.77%
0.00%
.0.44%

2004

January
February
March
Apnl

I 28%
096%

2002

.S

119%
t.28%
0.52%

May

June
Jelly

-0.44%
0.46%

August
September
October
November
December

Sharpe Ratio (Monthly)
Stearpe Ratio (Roll/rig 12)
Sharpe Ratio (Annualized)
Std. 0ev. (Monthly)
Std. Dxv. (Rolling 12)
Std. 0ev. (Annualized)

2003
0.70%
0.59%
0.46%

1.77%
1.23%

0.7 1%

0.75%

1.04%

088%

-0 19%

0.60
4 48
2.35
o 54%
1 00%
1.88%

Be nc h marl<

Lehman Aggregate Bond Index

Beta

019

Alpha

o 68%

R

0 52
0 27

R Squared

Currency Class
Minimum Investment
Prime Broker/Custodian
Administrator
Legai Counsel
Auditor
Last Audit
Additions
Redemption Frequency
Redemption Notice Period
Managerirent Fee and Incentive Fee
Other Fee
High Water Mark
Hurdle Rate
Lockup
Early Redemption Fee
Benchmark tor Graphing
Benchmark for Correlation Values
Geographic Location of Money Invested
Instruments Traded
Options
Currencies
Futures
Average Number of Positions
Aunrage Portfolio Turnover
Current Net Exposure
Typical Net Exposure
Percent Long
Percent Short
Typical Leverage
Current Leverage

CONFiDENTIAL

USI)
$5,000,000
NIA
RK Consutlrng LLC
Schulte Roth & Zabel LLP
Crest & Young
Fissiul year end December 31, Audit date September
$1.000,000
Quarterly
90 Days

1% *5%
Expense Cap of 010% per month
Yes
5%

1 Year
None
Lehman Aggregate Bond Index
Lehman Aggregale Bond Index
Invests in a diversified portfolio of hedge fund managers
Invests in a diversified portfolio of hedge lurid managers
N/A
NI/A

N/A
31 Managern
Low-10% pur year
NIA
NI/A

NIA
N/A
NI/A

NIA

SSMT02257880
SSMSAA2257880

Please describe the current asset allocation to
each subadeisor. (Based on March 2004
allocation)

Ascot
MichatlArigelo
Long Honzons
JMG Capital
Footbridge
Ill Fund
Ellirrgton
Clipper Fund

D E Shaw
MKP

1 5%

Manner
Bayou
Vega
Hartierl
Fortress

4 9%
3 0%
3.2%
3,7%
5 0%

Stark

08%

Gabnel Capcal
ARX
Satellite
Allen Ast
LileSpeed
Dalton
I-lighBridge
Perry
DC Capital
Sinos
Greenlight Maslefs
SP Growth
Moore
Trigon
'AsteS Allen

5.4%
2.1%
3.7%
5.2%
4.9%
600/,
2 0%
2.4%
9 4%

1 3%

.:r/433l .

2.9%

28%
o 6%

11%
11%
1.1%

30%
10%
2.7%
1,8%
11.8%
1.6%
1,5%

07%

'Si.

Please provide chart of fund of funds
performance vs. benchmark.

tireo
$1.140

11.120'

Surto
Seeuilty Fund

11.00e

"°°'°Leheuoo Aggegte Bond Inder

tuteo
$1,040'

tue0
Sep02

.i(:

:p
Please provide chart of annual returns vs.
standard deolallon

OdIO

Oct'02

Oct'02

Nov02

N0002

.in-û3

Oev'02

teb'03

S st 7cc4

5(050b

S

Seconde Fond

j'0L.hn0000 Attr000to Bond indeo

Q%i
0%

1%

2%

3%

4%

5%

8%

7%

0%

9%

0%

Sendord tenOtico

What percentage of your assets under
04anagement are onshore vs. offshore?

4otv:.
95%

What is the percentage of tirol assets and
Investor Type
number of accounts in hedge fund strategies for oiporatioiis/Pension Funds
Public Retirement Systems
each of the tollowing?
FoundotjonnlEydowrnenls
High Net 'Math Indroiduals
Fund of Funds
Other Institutions

% of Firm Assets

Number of Accounts

7 12%
0.00%

o

0.00%
89,01%

91

o

387%
0.00%

o

Please estimate the current maximum capacity The maximum capacity of SP Capital Security Fund is $1 5 billion
of your fund, taking into account the number of
managers iur rvtrich you ore currently invested.

I:

At what asset level (In terms of total fumi assets
under niaroagement and fund assets under
management) are your likely to close the fund?

The maximum capacity for the tirni is $2.5 billion

Will you add a manager(s) to the fund to
Increase capacity?

Ath onticipale adding new managers lo the fund, which will increase the capacity. However, new managers will not be
added tar the eeplic't purpose of irroeesirig capacity

CONFIDENTIAL

SSMT02257881

SSMSAA2257881

Sterling Stamos
Due Diligence Guide
Fund: Security
1.0

Related Companies

1-01

Investment Advisor
Legal Name of Management Company
Place of Incorporation
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address
Contact I'erso,i
Legal Name of General Partner
Place of Incorporation
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address
Contact Person

1 -(12

SP Capital Manage ment, LP
State of Delaware
575 Fifth Avenue, 40e, Floor, NY, NY 10017
(212) 4854370
(212) 4854371

SSP Associates GP, LLC
State of Delaware

575 Fifth Avenue, 40" Floor, NY, NY 10017
(212) 4854370
(212) 4854371

petertamosmspcapitalgroup.com
Peter S. Stamos

SP Capital Security Fund, LP
State of Delaware
575 Fifth Avenue, 40" Floor, NY, NY 10017
(212) 4854370
[phone]
[e-mail]

Peter S. Stamos

Administrator
Company Name
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address
Contact l'erson

1-04

PeterS. Stamos

Investment Company/Vehicle
Legal Name of Fund
Place uf Incorporation
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address
Cnntact Person

1-03

peter.stanmos(4spcapiti lgrou p.comn

RK Consulting, LLC
3 Becker Farm Road, Roseland, NJ, 07068
[phone]

[phone]

haltmang'rkco.com

Howard Altman

Auditor
Ernst & Young

Company Name
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address

1-1)5

Lonathaii.ansbaclserCey.comn

Contact Person

Jonathan E. Ansbacher

Legal Adviser Domestic
Company Name
Mailing Address
Primary Telephone Number
Primary Fax Number

CONFIDENTIAL

5 Times Square, NY, NY 10036-6530
[phone]
[phone]

Schulte Roth & Zabel LLP
919 Third Avenue, NY, NY 10022
[phone]
[phone]

SSMT02257882

SSMSAA2257882

Primary Email Address
Contact Person
1-06

ph.soie.brestowsrz coir
Stephanie R. Breslow

Legal Adviser Offshore

Company Name
Mailing Address
Primary Telephone Number
Primary Fax Number
Primary Email Address
Contact Person
1-07

CONFIDENTIAL

Walkers
PO Box 265 CT, Grand Cayman, Cayman Island

LegaI Adviser UK

NA

[phone]
[phone]

tbvides4walkers.comy
Timothy Bridges

SSMT02257883

SSMSAA2257883

Sterling Stamos
Due Diligence Guide (Cont.)
Fund: Security
2.0

Investment Manager

2-01

Company History

Sterling Stamos was founded in July 2002 as the
investment office of Saul II. Katz, Fred Wilpon, and Peter
S. Stamos. In addition to managing the assets of the
founding partners, Sterling Stamos officially opened to
outside investors in October 2002 and 110w manages
investments on behalf of liver 125 families and
institutions. The Management Company and General
Partner are SP Capital Management, LP and SSP
Associates GP, LIC, respectively.

2-02

Company Structure

SP Capital Management, LP is structured as a Delaware
Limited Partnership

2-03

Assets Under Management

Approximately $405 MM (as of March 1,2004) across
five investment funds

2-04

Goal for AUM in 5 Years

$ 2 Billion across multiple investment funds

2-05

Description of Products

1.) Security Fund - a multi-manager portfolio of hedge
funds that serves as an alternative to fixed income and
seeks to achieve moderate absolute returns (8-10%), with
low quarterly volatility (2-4%).
Levered Fund - a multi-manager portfolio of hedge
futsds that is structured through a total 'ate of return
swap that seeks to achieve moderate absolute returns
(10-12%), with low quarterly volatility (3-5%).
Growth Fund- a multimanager portfolio of hedge
funds that serves as an alternative to equity investments
and seeks to achieve moderate absolute returns (1215%), with low quarterly volatility (3.5%).

2-06

Management Company Ownership

TBD

2 07

VartnerCapitaUnvested

Security Fund - Approx. $38 MM
Friends & Family Fund - Approx. $23 MM
Levered Fund - Approx. $ 35MM
Growth Ftusd - Approx. $17 MM
Growth (Offshore) - Approx. $3 MM
Total Approx. $116 MM

2-08

Registration with Regulatory Authorities

Neither the General Partner nor the Management
Company is currently registered as an investment
adviser under he Investment Advisers Act of 1940, but
is currently in tile process of registering. The General
Partner and Management Company arc exempt from the
Commodity Futures Trading commission ("CFTC") and
operate the funds under rule 4.13(a)(4) and 4.13(a)(3).
None of the funds are registered as an investment
company under the Investment Company Act of 1940
and all funds rely on the exclusion fro the definition of
"investment company" provided in Section 3(c)(7) and
Section 3(c)(1) of the Company Act.

CONFIDENTIAL

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2-09

Lawsuits, Regulatory, or Tax Issues

NA

2-10

Trading for Company Account

NA

2-11

Corporate Culture

Firm is buiti on a foundation of trust. service, and
proessionaiism. the principio of treating our investors
as partners and always putting their interests first,
dictates all decisions of the finn.

2-12

Strengths

Forward looking approach to portfolio conshuction;
Access to economic, geopolitical, and financial
information; Access and capacity in emerging and
closed fund managers; Long term relationships with
leading investment managers; concept of collective
intelligence between hedge fund managers, academic
institutions, investment partners, and wall street firms.

2-13

Weaknesses

Limited operational history of the firm

2-14

Greatest Failure

Investment in a singlo hedge fund manager that was
forced to liquidate its positions in 2002 due to fraud.

2-15

Fund Discontinuations

NA

CONFIDENTIAL

SSMT02257885

SSMSAA2257885

Sterling Stamos
Due Diligence Guide (ConL)
Fund: Security
3.0

Personnel Background

3-01

Portfolio Management

Peter S. Stamos
Ashok Chachra
Ellen Horing

3-02

'l'rading

NA

3-03

Risk Management

Peter S. Stanios

3-04

Operations

Kevin Barcelona
Kevin Okimoto

3-05

Research

Ashok Chachra
Rohit Kurnar
Catherine Tse
Ted Conrads
Catherine Liu
Angela Rainsford

3-1)6

l'rogramniing

NA

3-07

Administration

Spiro Stamos
Kevin Barcelona

3-08

Marketing

Christopher Stamos
Scott Whutcher

Kevin ()kitnoto
3-09

Back Office

Kevin Barcelona
Jennifer Webster

3-10

Current Number of Employees

20

3-11

Number of Employees 3 Years Ago

NA

3-12

Employee Turnover

Noreen Harrirìton
Derek Daley

3-13

Hiring

Actively recruit analysts and associates from leading
academic institutions, Attract and retain top employees
by providing an intellectually challenging working
environment where young employees have the
opportunity to significantly contribute to the growth ot
the Firm.

3-14

Other Business Involvement

Several of the key employees of the Firm are actively
involved on various corporate and non-profit boards.

3-15

Compensation

All employees are compensated on a salary and bonus
schedule dependent on their individual, team, and
overall firm performance for the year.

3-16

Personal Account Trading

NA

CONFIDENTIAL

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3-17

Number of Employees in Front Office

4

3-18

N umber of Employees in Back Office

2

3-19

Back Office Organization

Chief Financial Officer is responsible for all financial and
strategic decisions associated with the Back Office. 1he
Back Office Manager is responsible for the day-to-day
operations of the Back Office.

3-20

Investment in Research

The Firm pro-actively invests in technology, software,
and staff to appiopriately manage research activities.
(Bloomberg, Altvest, PerTrack)

3-21

Marketing Channels

The firm does not actively market its interests in the

funds. High Net Worth individuals typically invest
directly through the Firm principals, while institutions
arc funneled through strategic peutnership relationships
with various placement agents.

CONFIDENTIAL

SSMT02257887

SSMSAA2257887

Sterling Stamos
Due Diligence Guide (Cont.)
Fund: Security
4.0

Investment Product Details

4-01

Current Strategy Allocation

Market Neutral - 63%
Event Driven -14%
Equity Hedged -18%
Global-4%

Cash-1%
4-02

Maximum strategy allocation

80% - Market Neutral
20% - Event
20% - Equity Hedged
10% - Global
15% Sub-strate8y maximum allocations
Single Manager 10%

4-03

Minimum strategy allocation

60% - Market Neutral
5% - Event
5% - Equity Hed8ed
0% - Global
1% minimum strategy allocation
0.5% minimum single manager

4-04

Allocation decision

Investment allocations are made as a result of our macro
economic perspective on investment opportunities

within the risk / return ohjectiv of the lund. General
guidelines are set for strategy allocations, with minor
tweaks to the portfolio made in an opportunistic
manner.
4-05

Current Fund Size

$135 MM

4-06

Fund Growth

2002 (Year End Balance) - $15 MM
2003 (Year End Balance) -$89 MM

4-07

Fund Structure

Domestic Limited Partnership

4-08

Share Classes

NA

4-09

Cross Liabilities

The Security Fund invests in the Growth Fund

4-10

Reference Currency

US Dollars

4-11

Fund Status

Open to new investors

4-12

Listings

NA

4-13

Subscription Frequency

Monthly

4-14

Notice Period for Subscriptions

Subject to GP discretion

4-15

Minimum Initial Investment

$5,000,000 (Subject to GP discretion)

4-16

Minimum Additional Investment

$1,000,000 (Subject to GP discretion)

CONFJDENTIAL

SSMT02257888

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4-17

Front End Load

NA

4-18

Back End Load (Redemption Fee)

NA

4-19

Lock-Up Period

Initial one year lockup

4-20

Redemption Frequency

Quarterly

4-21

Redemption Day

Last business day of the relevant quarter

4-22

Notice Period for Redemptions

90 days prior written notice

4-23

Initial Payout Ratio

95% o1endingcaptal account balance

4-24

Initial Payout Period

Within 30 days of redemption date

4-25

Remaining Payout Period

Within 30 days of the relevant years audit

4-26

Redemption Payment

Cash Redemptions

4-27

Redemption Sto1,

Subject to GP discretion

4-28

Annual Management Fee

1%

4-29

Annual Management Fee Payment

Pre-paid on a quarterly basis

4-30

Performance Fee

5%

4-31

Performance Fee Payment

Ertd of the year

4-32

Equalization Factor

NA

4-33

High Water Mark

Yes

4-34

Hurdle Rate

5%

4-35

Other Fees

Expense Cap of 0.10% per month

4-36

Sponsor

NA

4-37

Number of Investors

88

4-38

Investor Concentration

50%

4-39

Client Mix

Institutions - 18%

Family Ptities -9%
Trusts -- 28%

HNW Individuals - 45%
4-40

Side Letters

Current side letter with Deutsche Bank to facilitate the
investment through a total rate of return swap. The
terms of the side letter are primarily related to bank
regulatory restrictions.

4-41

Managed Accounts

NA

4-42

Difference in Fee Structure

NA

4-43

Clients Gained

61 Investors Gained Since 3/1/03
$84 MM Raised Since 3/1/04

CONFIDENTIAL

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4-44

Clients Lost

No outside clients have left the firm

4-45

Redemptions by Key l'ersonnel

Key personnel members have rebalanced as additional
funds have been launched

4-46

Oldest Account

July 2002

4-47

3 Largest Withdrawals

$3 MM, January 2004 Reallocation within SI'
$2 MM, January 2004 Reallocation within SP
$2 MM, January 2004 Reallocation within SP

4-48

Average Investment Period

W Months

CONFIDENTIAL

SSMT02257890

SSMSAA2257890

Sterling Stamos
Due Diligence Guide (Cont.)
Fund: Security
5.0

Investment Product Strategy

5-01

Strategy description

5-02
5-03

5-04
5-05

Trade example
Target return (net to investors)
Target standard deviation of returns
Asset classes

5-06

Asset break-down

SP Capital Security Fund, LP is a multi-manager portfolio
of hedge funds, created with the objective of generating
consistent, moderate absolute returns with tow volatility.
As an alternative to fixed income, the rund invests
substantially all of its assets io Arbitrage strategies that
generate returns by identifying pricing inefficiencies in
various markets.
Not necessary
8% - 12%
2% - 4%

Stocks, government bonds, corporate bonds, options,
convertible bonds, asset backed bonds, mortgage backed
bonds, currencies, swaps
OPTIONS AEB

54%

CON VERT ARB

7.4%

ASSET BACKED

13.7%

EQUITY MN

3.0%

MBS ARB

2.0%

FI ARB

9.9%

STAT ARB

9.4%

MULTI STRATEGY

3.7%

DISTRESSED

4.7%

LIS CREDIT

2.9%

MERGER ARB

0.8%

EVENT

5.2%

L/S VALUE

2.7%

IlS GENERALIST

1.1%

L/S MULTE

13.6%

1,/S EQUITY

17.5%

EMERGING MRKTS

1.6%

MACRO

2.2%

CASH

CONFIDENTIAL

9.4%

CM' STRUCTURIi

1.4%

SSMT02257891

SSMSAA2257891