SEC Charges Adviser, Principals With Financial Fraud
A complex structure, attractive interest rates, a history of payments to investors and omissions about the opaque finances of the group of firms aided promoters in raising over $350 million from investors as the business collapsed. SEC v. Aequitas Management, LLC, Civil Action No. 3:16-cv-00438 (D. Or. Filed March 10, 2016).
Defendants Robert Jesenik, Brian Oliver and Scott Gillis owned and controlled a group of companies under defendant Aequitas Management. Those firms included: Aequitas Holdings, LLC, which owned Aequitas Commercial Finance, LLC or ACF, which controled at least seven subsidiaries that acquired or invested in a portfolio of trade receivables as well as Acequitas Capital Management, Inc. or ACM, and had stakes in the Acquitas Funds and other affiliates; ACM also served as the manager of ACF and was the sole owner of Aequitas Investment Management, LLC, a registered investment adviser and the manager of the Aequitas Funds. Each of the aforementioned named entities is a defendant in the litigation.
Since 2003 ACF has raised hundreds of millions of dollars from numerous investors through the issuance of promissory notes at favorable rates through a program known as the Private Note Program. At the end of 2015 about $312 million in ACF notes were outstanding to approximately 1,500 investors. The funds raised through private placements were for funding or financing the purchase of student loan receivables, healthcare receivables, loan portfolios and to engage in other debt transactions. ACF and the group also sold notes issued by the Aequitas Funds. At the end of 2015 about $101.5 million in notes were outstanding.
From 2011 through 2013 ACF was profitable. Its largest category of assets was trade receivables. Those were heavily concentrated in education loans from one of its subsidiaries, Campus Student Funding, LLC. They had been acquired from Corinthian Colleges in pools. ACF relied on continuously raising funds to meet its immediate cash needs and its high operating expenses.
In 2014 Corinthian suffered serious financial difficulties. The next year it defaulted and filed for Chapter 11 protection. This impacted ACF and the group. By 2015 its financial condition became very difficult. Indeed, in that year, as well as the prior one, the firm suffered losses.
Despite the difficult financial circumstances, funds were still raised from investors and expenses were not curtailed. Over a two year period, beginning in January 2014, about $350 million was raised from investors through ACF and the Aequitas Funds. In raising those funds potential investors were not told of the increasingly difficult financial circumstances of ACF. Rather, those circumstances were concealed by an intercompany loan from ACF to its parent, Aequitas Holding. The note from that arrangement was one of the largest assets of ACF. Its collectability was essential to the entire group. ACF’s ability to pay investors depended on the collectability of the Aequitas Holdings note. In 2014 that firm had significant losses and did not have sufficient assets to serve as collateral for the debt. These facts were not disclosed to investors. Investors also were not told that their funds were used primarily to repay other investors.
While ACF appeared to be financially viable due to the intercompany receivable, in fact it slid toward insolvency. By 2016 the balance of the intercompany loan exceeded $180 million and the Aequitas group of firms began to collapse. About 80 of the group’s 120 employees were terminated. In February 2016 a consultant was retained to conduct an orderly wind-down of the business.
The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is in litigation.