Aequitas Management, LLC – SEC Files Complaint | Goodman & Nekvasil P.A. May Recover Investor Losses
Securities and Exchange Commission Files Complaint Against Aequitas Management, LLC
ACCORDING TO THE SEC:
This litigation arises from a scheme to defraud and misuse client assets in connection with investments offered through the Aequitas group of companies, founded by Robert J. Jesenik and based in Lake Oswego, Oregon. Jesenik controls the entire Aequitas enterprise, the ultimate parent of which is Aequitas Management, LLC (“Aequitas Management”). Since 2014, Jesenik, together with his longtime chief fundraiser, Brian A. Oliver, has defrauded investors into thinking that they were investing in a portfolio of trade receivables in the healthcare, education, transportation, or consumer credit sectors. In reality, Jesenik, Oliver, and—after he joined Aequitas in early 2015, former Chief Financial Officer and Chief Operating Officer, N. Scott Gillis—used the vast majority of investor funds to repay prior investors and to pay the operating expenses of the Aequitas enterprise, which far exceeded the fees Aequitas’s affiliated entities told investors they would charge for managing the investments.
Jesenik and Oliver raised funds primarily by issuing promissory notes through Aequitas Commercial Finance, LLC (“ACF”), an entity wholly owned by Aequitas Holdings, LLC (“Aequitas Holdings”), and through promissory notes and other interests issued by a series of Aequitas-affiliated investment funds (the “Aequitas Funds”). The manager of ACF is Aequitas Capital Management, Inc. (“ACM”) and the manager of the Aequitas Funds is Aequitas Investment Management, LLC (“AIM”). Aequitas Management, Aequitas Holdings, ACF, ACM, and AIM are referred to collectively as the “Entity Defendants.”
The ACF notes were typically offered on one to four-year terms with interest rates generally between 5 and 15 percent. According to its financial records, ACF appears to have been profitable from 2011 to 2013. However, in May 2014, Corinthian Colleges (“Corinthian”), a for-profit education provider, whose receivables made up 75% of the receivables owned by ACF, defaulted on its obligations to ACF, exacerbating the significant cash flow shortages of ACF and its parent, Aequitas Holdings. By at least July 2014, Jesenik and Oliver knew that redemptions and interest payments to prior investors were being paid primarily from new investor money in a Ponzi-like fashion, and that very little investor money was being used to purchase trade receivables. The cash flow shortages at ACF and Aequitas Holdings continued with increased severity through 2015.
Rather than change the business to reduce expenses or increase operating income, Jesenik and Oliver decided to cover the cash shortfall – and continue paying the growing expenses of the enterprise, including their own lucrative salaries, a private jet and pilots, and dinners and golf outings for prospective investors – by raising funds from new investors and convincing prior investors to reinvest. Between January 2014 and January 2016, they raised approximately $350 million through ACF and the Aequitas Funds.
However, they never disclosed to investors that: (1) ACF and Aequitas Holdings were effectively insolvent; (2) the vast majority of investor funds was not used to purchase trade receivables but instead to pay redemptions and interest to prior investors and to pay for operating expenses; and (3) only a fraction of the notes issued by ACF and the Aequitas Funds were backed by trade receivables. ACF and the Aequitas Funds also sent out quarterly updates to investors, approved by Jesenik and Oliver and with financial information approved by Gillis, falsely stating in 2015 that ACF was using investor money primarily to purchase receivables. By the end of 2015, ACF owed investors $312 million and had virtually no operating income to repay them.
ACF made itself look financially viable by keeping an intercompany loan to its parent company, Aequitas Holdings, on its books that it counted as its largest asset even though Jesenik, Oliver and Gillis knew that Aequitas Holdings did not have the assets to pay ACF back. By the beginning of 2016, the balance on the loan exceeded $180 million and the Aequitas enterprise began to collapse. ACF announced it could no longer meet its obligations to investors, and the Aequitas companies announced layoffs of approximately 80 of their 120 employees. In early February 2016, they hired a consulting firm to conduct an orderly wind-down of the business.
Defendants violated the antifraud provisions of the Securities Act of 1933 (“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Investment Advisers Act of 1940 (“Advisers Act”) in connection with the offer and sale of securities issued by ACF and the Aequitas Funds. ACM and AIM, the Defendants responsible for managing ACF and the Aequitas Funds, also breached their fiduciary duties by misusing millions of dollars in client assets.
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