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Collapse of Aequitas Capital Management

March 1, 2016

Executive Office

Aequitas Capital Management’s recent spiral is unique among corporate downfalls and crises because of how quickly it happened. In just a few weeks time, the capital management firm has gone from promising up-and-comer to a heavily struggling enterprise. While there may have been a few missed warning flags, the downfall of Aequitas Capital Management is a warning flag for investors that deals aren't always what they seem.

The Beginning of the Aequitas Capital Management Fall

Aequitas Capital Management was a growing company, reporting approximately $1.7 billion in total managed assets. However, in recent weeks, the company has begun collapsing and unraveling in connection with the sale of unregistered high-pay debt instruments. Investors had purportedly invested nearly $600 million in Aequitas loans, and it is unclear how much they stand to recover.

The liquidity shortage involved the purchasing of hard-to-collect debt from entities such as colleges and hospitals. Aequitas would obtain the debt at about 70 cents on the dollar, and then attempt to register profits for investors by collecting on the debts.

The company began experiencing difficulties related to commissions on student loan portfolios as early as 2014. In particular, one source of student loan debt for Aequitas, Corinthian Colleges, went out of business in spring 2015, creating serious burdens for the company.

One financial adviser, Chris Bean of Private Advisory Group, is particularly distressed over the situation. His firm has 330 clients who have invested in Aequitas, and he has his hands full trying to explain the situation to them. Bean alleges that Aequitas kept him “in the dark” about its financial difficulties, and accuses executives of painting a misleading picture regarding Aequitas’ downward-spiraling financial situation.

The Spiral Continues

Amidst the chaos, several more developments have emerged, further adding to the company’s state of disarray:

  • Aequitas has now announced its plans to reorganize and downsize according to the Portland Business Journal. This began as late as last January, and came as a surprise to many as the company wasn’t revealing any prior signs of distress.
  • Shortly after its January announcement, the Oregonian reported that Aequitas layoffs broadened to include about 80% of its employees.
  • Two of the company’s senior partners, Brian Rice and CFO Scott Gillis have resigned since then.
  • Aequitas’ general counsel has resigned as well.  

Investigations Ensue

Aequitas is now under investigation by several different regulatory bodies. The U.S. Securities and Exchange Commission as well as the Consumer Financial Protection Bureau have purportedly begun independent investigations. Lawsuits are also being filed in connection with the situation. Most of these allege that Aequitas failed to clearly disclose risks associated with the investments, and may have overstated assets; there may be Ponzi scheme aspects involved as well.

Take-Aways from the Aequitas Downfall

Jeff Benjamin, writing for InvestmentNews, says that the current Aequitas crisis underscores the importance of due diligence. Investors should, of course, take caution with where they choose to place their assets.

Part of the problem with the Aequitas example is that many investors did not suspect any type of foul play or discrepancies until it was too late. Financial advisors who are licensed under FINRA are subject to strict requirements regarding issues that include the acceptable risk levels for their clients, as well as general misrepresentation. Here, it seems as though several warning signs may have been overlooked as investors placed their faith in a somewhat “rosy picture” painted by Aequitas.

If you have any issues or concerns regarding fraud in the corporate sector and would like to speak with an attorney, contact us at Kessler Topaz. Our team of attorneys is dedicated to protecting investors and consumers from misconduct, securities fraud, and negligence by businesses and fiduciaries.