The US Securities and Exchange Commission (SEC) has started enforcement proceedings against Aequitas Management, an Oregon credit firm that is alleged to have defrauded and misused clients’ assets in a Ponzi-like scheme.
The SEC has charged the firm and three top executives, accusing them of failing to disclose its deteriorating financial condition while continuing to raise more than $350 million from investors.
Robert Jesenik, one of the defendants in the litigation, founded the Aequitas group of companies, based in Lake Oswego, Oregon, in 1993. The firm provides private equity and commercial finance to mid-market companies in the healthcare and energy sectors, according to PEI Research & Analytics. The majority of its clients are foundations and endowments.
The firm was raising Aequitas WRFFI, a 2014-vintage growth capital vehicle targeting $25 million, and was investing its 2014-vintage Aequitas Capital Opportunities Fund that raised $102 million, according to PEI Research & Analytics. However, the firm has ceased all fundraising activity.
Aequitas funds have been engaged primarily in investing in securities related to the purchase and financing of trade receivables. Since 2013, it has also raised hundreds of millions of dollars from thousands of investors through the issuance of promissory notes, referred to internally as the private note programme.
The private placement memorandum for the programme states that the funds will be used to engage in various specialty financing transactions, to provide senior and junior debt and equity funding for the benefit of the firm’s affiliates and its related investment programme, and to repay previously issued notes.
“Since 2014, Jesenik, together with his longtime chief fundraiser Brian 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,” the SEC noted in its complaint.
“In reality, Jesenik, Oliver, and after he joined Aequitas in early 2015, former chief financial officer and chief operating officer 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.”
The vast majority of Aequitas’s investor money was concentrated in student loan receivables of Corinthian Colleges, which defaulted on its resource obligations to Aequitas in mid-2014, exacerbating the firm’s already severe cash flow problems.
The cash flow shortages increased through 2015, but instead of changing the business or reducing expenses or increasing 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 money from existing and new investors, according to the SEC complaint.
By the end of 2015, Aequitas owed investors $312 million and had no operating income to repay them. They then proceeded to lay off about 80 of their 120 employees and last month hired consultants to conduct an orderly wind-down of the business, the SEC wrote.
The SEC is seeking permanent injunctions, disgorgement with prejudgment interest and monetary penalties from all defendants. It is also seeking to prohibit Jesenik, Oliver and Gillis from serving as officers or directors of any public company.
“The SEC believes that a deteriorating financial condition is a material condition that requires disclosure,” Todd Cipperman of Cipperman Compliance Services wrote in a note on Monday. “In fact, item 18.B of Form ADV explicitly requires disclosure of any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.”
Aequitas’s most recent fund was IOF II, which raised a total of $70 million during 2015, according to the SEC. The majority of its clients are foundations and endowments, according to PEI Research & Analytics.