An Oregon company is facing allegations by the Securities and Exchange Commission that it operated a "Ponzi-like" scheme that raised hundreds of millions of dollars from over 1,000 investors around the country. Aequitas Management LLC ("Aequitas") was named in a civil enforcement action filed yesterday by the Securities and Exchange Commission alleging that the company, which last year orchestrated an orderly liquidation and winding down of its business, violated federal securities laws in raising hundreds of millions of dollars from investors. The Commission filed its action against Aequitas and its senior management team, including founder Robert J. Jesenik, fundraiser Brian A. Oliver, and former Chief Financial Officer N. Scott Gillis, and is seeking injunctive relief, disgorgement of ill-gotten gains, imposition of civil monetary penalties, officer and director bars, and appointment of a receiver.
Aequitas and a related group of companies was founded by Jesenik in the early 1990s. Aequitas, which is majority owned by Jesenik, Oliver, and Gillis, sits at the top of a complicated organizational structure that includes over 75 active entities. One of the related entities, Aequitas Commercial Finance, LLC ("ACF"), began raising money from investors in 2003 through the issuance of high-interest promissory notes to more than 1,500 investors. The notes, sold directly and through registered investment advisors, carried terms ranging from one to four years and promised investors annual returns ranging from 5% to 15%. Through offering documents, investors were told that their funds would be used for several purposes including the funding of receivables in the student loan, healthcare, and other industries. Investors were assured that the notes issued to them were secured by the personal property of ACF.
While ACF disclosed that the purchase of student loan receivables were one of the uses of investor funds, investors were not told that their funds were heavily concentrated in receivable purchased from troubled for-profit education provider Corinthian Colleges ("Corinthian"). Those receivables were subject to a resource agreements that required Corinthian to buy back any receivables that became delinquent by more than 90 days, which included monthly payments from $4 to $7 million in early-to-mid 2014. However, Corinthian began encountering financial difficulties in 2014 and stopped making monthly payments altogether to Aequitas in June 2014. Corinthian subsequently filed for Chapter 11 bankruptcy protection in May 2015.
However, rather than disclose the true nature of Aequitas's exposure to Corinthian, the Commission alleges that Aequitas and its executives ramped up efforts to sell short-term notes to investors. Indeed, during the latter half of 2014 ACF raised nearly $25 million from the issuance of 6-month notes carrying annual interest rates ranging from 11% to 12%. Later that same year, ACF also began offering one-year notes touting 15% annual interest rates. As those short-term notes began coming due, the company disclosed that it would be unable to meet its obligations.
According to the Commission, the offering documents distributed by ACF representing that the primary use of investor funds was to purchase trade receivables was false. In 2014, the Commission alleged that only about 25% of investor funds were used to purchase trade receivables, while that figure dropped to 8% in 2015. Indeed, the Commission alleged that the operation had likely morphed into a Ponzi scheme by mid-2014 when
the vast majority of investor money to cover redemptions and interest payments to prior investors and to pay the operating expenses of the entire Aequitas enterprise...In reality, at least by July 2014, ACF was generally paying the principal and interest due on prior ACF notes from the proceeds of investments, in a Ponzi-like fashion
Aequitas has consented to the imposition of an injunction enjoining it from raising additional funds from investors and also agreeing to the appointment of a receiver to marshal and secure assets for the benefit of defrauded investors.
A copy of the Commission's Complaint is below: