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Aequitas Ran a Ponzi Scheme, SEC Says

PORTLAND, Ore. (CN) - The Securities and Exchange Commission says in a federal lawsuit that Oregon-based investment firm Aequitas and its subsidiaries operate a Ponzi-like scheme that defrauded its customers of approximately $350 million.

The SEC says the top three executives of Aequitas Management- CEO Robert Jesenik, executive vice president Brian Oliver and chief operating officer N. Scott Gillis - were aware as early as 2014 that constraints in their company's cash flow would make it difficult to meet their obligations to existing customers, but raised additional money on false premises as a means of propping up their company.

All three executives are named as defendants in the SEC's lawsuit.

When the executives learned of large discrepancies between their assets and obligations, they declined to cut expenses and instead raised hundreds or millions of dollars from new investors by promising to invest their money in the market, the SEC says in its 30-page complaint filed March 10.

However, the company did not invest this money as promised and instead used it to pay interest to prior investors while continuing to fund lavish salaries and lifestyles, the complaint says.

Aequitas Management was the parent company of numerous smaller attached companies, all of which raised funds using promissory notes, according to the complaint. Essentially, an investor would contribute a principal amount and then Aequitas issued a note promising that principal plus interest ranging anywhere from 5 to 15 percent annually, according to the SEC.

The company was profitable from 2011 to 2013, as the company raised cash on a segment of the market called trade receivables - financed assets tagged onto commercial debts generated by the sale of goods and services between businesses.

In 2014, Aequitas Management made a large bet on Corinthian College, a multi-campus Canadian for-profit college that was effectively shuttered after the province of Ontario suspended its operating license in early 2015.

Corinthian College declared Chapter 11 bankruptcy in May 2015, putting a serious dent in Aequitas finances since 75 percent of its trade-receivables portfolio was wrapped up in the for-profit college chain, according to the complaint. Aequitas was receiving between $4 and $7 million per month from Corinthian Colleges before the company began defaulting on its obligations.

The SEC says that instead of tightening expenses after the crippling blow to its fund, the company sought new investors who were told that their money was being invested in trade receivables. However, the new investments were used to continue paying older investors in a Ponzi-like fashion, according to the complaint.

Additionally, Aequitas issued more promissory notes with unrealistically high interest returns, from 10 to 15 percent, as a means of attracting new customers. Aequitas raised approximately $350 million between January 2014 and January 2016, the SEC says.

The company further disguised its insolvency by giving itself a loan through one of its subsidiary operations. By October 2015, the company showed a $100 million discrepancy between its assets and obligations, according to the complaint.

All the while, the three executives continued to pay themselves high salaries, with Jesenik making $685,000, Oliver receiving a salary of $350,000 and Gillis receiving $400,000, the SEC says.

The company also continued to maintain a private jet with pilots, pay for high-end dinners and golf outings to attract new investors and open an office in New York, while remodeling its office in Lake Oswego, Oregon, the complaint says.

In January, the company ceased making payments to its investors, laid off 80 of its 120 employees and hired an outside company to wind down the business operation, the SEC says.

The SEC is seeking civil fines and wants the defendants forfeit any ill-gotten gains, while being barred from further work in the securities industry.

Other defendants include Aequitas Holdings, Aequitas Commerical Finance, Aequitas Capital Management and Aequitas Investment Management.

A voicemail left with Aequitas Management was not returned as of press time.

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