The Securities and Exchange Commission charged Aequitas Management, an Oregon-based private investment group, and three top executives with hiding the rapidly deteriorating financial condition of its enterprise while raising more than $350 million from investors.
Aequitas Management and four affiliates allegedly defrauded more than 1,500 investors nationwide into believing they were making health care, education, and transportation-related investments when their money was actually being used in a last-ditch effort to save the firm. Some money from new investors was allegedly used to pay earlier investors.
“We allege that Aequitas had severe and persistent cash flow shortages and top executives knew they weren’t using money raised from investors like they said they would. But they refused to disclose the true financial condition, continued to draw lucrative salaries, and roped even more unknowing investors into a losing venture,” said Jina Choi, director of the SEC’s San Francisco Regional Office.
The SEC’s complaint, which was filed yesterday in federal district court in Oregon, alleges that chief executive officer Robert Jesenik and executive vice president Brian Oliver were well aware of Aequitas’s “calamitous financial condition” yet continued to solicit millions of dollars from investors to pay the firm’s increasing expenses and attempt to stave off the impending collapse.
Former chief financial officer and chief operating officer N. Scott Gillis allegedly concealed the firm’s insolvency from investors and was aware that Jesenik and Oliver continued soliciting investors so that Aequitas could pay operating expenses and repay earlier investors with money from new investors.
According to the SEC’s complaint:
• From January 2014 to January 2016, Aequitas raised money from investors by issuing promissory notes with high rates of return typically ranging from 8.5 to 10 percent.
• While Aequitas did use some investor money to acquire trade receivables in health care, education, transportation, and other consumer credit sectors, the vast majority was concentrated in student loan receivables of for-profit education provider Corinthian Colleges. Corinthian defaulted on its recourse obligations to Aequitas in mid-2014, which significantly exacerbated the firm’s already severe cash flow problems.
• The executives continued to draw their lucrative salaries, use a private jet, and attend posh dinner and golf outings, all at the expense of investors. They used the outings to raise more money from investors. Jesenik, Oliver, and Gillis took home at least $2.5 million in combined salaries during this period.
• By November 2015, Aequitas could no longer meet scheduled redemptions. Last month, the firm dismissed two-thirds of its employees and hired a chief restructuring officer.
The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and monetary penalties from all defendants, as well as seeking to prohibit Jesenik, Oliver, and Gillis from serving as officers or directors of any public company.
The SEC’s complaint charges violations of the federal securities laws by Aequitas Management, Aequitas Holdings LLC, Aequitas Commercial Finance LLC, Aequitas Capital Management Inc., and Aequitas Investment Management LLC as well as Jesenik, Oliver, and Gillis.
Aequitas and the affiliated entities have agreed to be preliminarily enjoined from raising any additional funds by offering and selling securities, and agreed to the appointment of a receiver to marshal and preserve remaining Aequitas assets for distribution to defrauded investors. The stipulated orders are subject to court approval.
The SEC’s continuing investigation is being conducted in the San Francisco office.