By the time Corinthian Colleges filed for bankruptcy on May 4, 2015, its fraudulent practices were well known. Trouble had been brewing for years: The federal Consumer Financial Protection Bureau, the attorney general of California, and the attorney general of Massachusetts all brought lawsuits against it, arguing it was engaged in predatory lending to students who had no hope of repaying their loans. Corinthian had stopped filing financial statements with the Securities and Exchange Commission, and the Nasdaq Stock Market delisted it.
Once the biggest for-profit college in the U.S. and Canada, Corinthian had enrolled thousands of students who’d had to take out billions of dollars in student loans – some of them issued by Corinthian itself. Eventually, those students went on strike, refusing to pay the loans they’d been saddled with. Unlike most grads, however, Corinthian’s students weren’t getting a real education. They had been defrauded.
“The students realized Corinthian was a scam,” says David Halperin, a Washington, D.C., attorney who has chronicled the abuses of the for-profit college industry and the people in power who kept it going.
“Corinthian was one of the worst actors in an industry full of terrible actors,” he says. “It lied to students, it lied to the government, it offered poor-quality instruction for the most part at atrociously high prices.” Eventually, the U.S. Department of Education fined it for misleading students and began forgiving their debt.
But if the Corinthian scam was increasingly obvious to the greater public, one group remained in the dark: the investors who had kept it going by unwittingly buying up its students’ debt and trying to collect on it in one of the biggest Ponzi schemes in the registered investment advisory industry since the financial crisis.
That Ponzi scheme, according to the SEC, was run by Aequitas Management, the Lake Oswego, Oregon, financial firm that filed for bankruptcy less than a year after Corinthian. Before it collapsed, Aequitas claimed to manage $1.67 billion, which would likely make its downfall Oregon’s biggest-ever investment scandal.
And Aequitas, as it turned out, had tentacles spread throughout the RIA world.
The once high-flying Oregon firm opened offices in New York and London and wowed advisors by jetting them to Las Vegas and Los Angeles on weekend junkets. It dragged in high-profile enablers like brokerage TD Ameritrade, accountants Deloitte and EisnerAmper, and law firms Sidley Austin and Tonkon Torp. (In July, those firms agreed to pay an eye-popping $235 million to settle a class-action lawsuit from investors.)
The story of Aequitas serves as a wake-up call for RIAs — and one whose lessons still reverberate.
Ponzis come in all shapes and sizes, but their defining feature is that new investor money goes to pay off older investors — not to invest in the stated business activity. According to the SEC’s definition, “a Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors.”
“They can involve any type of business or investment program. It just has to have an air of legitimacy in order to persuade investors to put money into it,” says Kathy Bazoian Phelps, Ponzi expert and senior counsel at Diamond McCarthy in Los Angeles. Some she recounts seem pretty bizarre. “Would you like to buy an ATM or are you interested in a gold mine? I've seen a scheme involving an investment in emu chicks because when they grow up you can use their meat and oil as a delicacy in New Zealand. I've seen the flexi potato scheme, where you buy potatoes when they're cheap and you freeze them and you resell them when the price has gone up, and you've got guaranteed 20 percent returns.”
But ever since the Bernie Madoff Ponzi scheme lured in many big-name investors and institutions, it’s become clear that not all Ponzis are wacky schemes. Aequitas certainly wasn’t.
Instead, it was a sophisticated investment fraud that preyed on a fundamental RIA need for more assets under management to drive fee income.
Its allure? Aequitas lent money to other RIAs to grow their assets and offered them bond-like products bearing interest rates as high as 15 percent that supposedly involved little risk.
While Aequitas operated an RIA, that wasn’t all. The company, which had been around since 1993 and called itself an alternative investment advisor, had such a convoluted corporate structure that one Oregon wealth advisor, Stan Lochrie of Etesian Wealth Advisors, joked that “it looks like the schematic to a nuclear power plant.”
The many entities under the Aequitas holding company umbrella included a commercial finance arm that issued promissory notes backed by receivables — including student loans it had bought from Corinthian. Those notes were then sold to investors through a series of Aequitas-affiliated investment funds — including several other RIAs that had been convinced to peddle the high interest-bearing notes.
Between 2011 and 2014, Aequitas purchased more than $561 million in student loan debt, almost all of which was with Corinthian, according to a June 2017 class-action lawsuit filed against two Washington state-based, Aequitas-affiliated RIAs: Strategic Capital Group and Private Advisory Group, which settled the class-action case against them in October 2017 for $6.1 million.
Aequitas’ finances were already spiraling down, and the worse they got, the more student debt the firm bought from Corinthian. By May 2014, when the dodgy college filed for bankruptcy protection, some 75 percent of the receivables of the Aequitas notes came from it. The idea may have sounded foolproof: Aequitas bought the debt at a discount, then tried to collect on it. If it couldn’t do so, Corinthian promised to buy back the debt. But when Corinthian failed, it defaulted on its obligations to Aequitas, which continued to try to collect on the debt even though that debt’s legality was being challenged.
The name Corinthian was not mentioned to investors by Aequitas (or the other RIAs that sold its products) as it kept desperately raising money to keep afloat. According to the SEC, Aequitas’ principals “knew that redemptions and interest payments to prior investors were being paid primarily from new investor money” by July 2014. (Portland, Oregon, law firm Schwabe, Williamson & Wyatt, which was the receiver that analyzed Aequitas financial statements, found that some new investor money was being used to fulfill redemption requests from other investors in a “Ponzi-like” manner as early as 2011.)
But Aequitas kept going. Between 2014 and 2015, the firm had raised approximately $350 million from investors, the SEC charged in its fraud complaint. Even though the company shifted some money around through Aequitas’ various subsidiaries via intracompany loans, the game of musical chairs couldn’t keep Aequitas afloat. It began winding down its operations in February 2016.
The SEC’s civil case is still pending against Aequitas and its principals — co-founder and CEO Robert Jesenik, co-founder and executive vice president Brian Oliver, and former CFO N. Scott Gillis — all of whom the SEC is seeking to bar from the industry and make restitution.
Olaf Janke, another former CFO, pleaded guilty to associated federal criminal charges last month, and Oliver did so in April. Both are awaiting sentencing.
Jesenik, who had a reputation in Oregon financial circles as a flamboyant mover and shaker who loved fine wines, appears unrepentant. The 60-year-old financier has not pleaded guilty to anything — and he’s still working in the investment industry. Currently in the midst of a divorce from his wife of 34 years, Jesenik said in divorce court on July 17 that he is now working for a California investment firm, KCR Advisors, which he claims is co-owned by his son and daughter. The company was founded in May 2016, months after Aequitas went under. Jesenik did not respond to a request for comment.
The founders of Aequitas came out of Portland’s banking community, where locals were wary of them. Etesian’s Lochrie, a 35-year wealth advisory veteran, says they had a “sordid” reputation in Portland financial circles.
Lochrie acknowledges that might have been hard to detect for an outsider: Jesenik liked to drop names like Tony Robbins (before the motivational speaker was discredited in a #MeToo scandal), while Oliver was a devout Christian.
“From a national basis, it would be hard to see the little things going on in the background, the things you learn at the country club, but I talked to a number of people who had former dealings with these guys. They’d been around Portland for decades.”
Historically, he says, the men had been known locally as mini corporate raiders. “They bought something with leveraged money, bankrupted it, split it up, and took all the money. They had done pretty well. You just wouldn’t want to be involved with these guys.”
After the 2008 financial crisis, he recalls, Aequitas began pumping out the receivables-backed promissory notes.
Like other RIAs, Lochrie had been approached by Aequitas to come onto its platform. But he was skeptical of the product. “We asked that question back in 2013: Where are these receivables coming from? I’m very familiar with debt collection. It’s a low-margin business. How are you generating these margins? Who are you working with to make these margins high enough to make accredited investors these types of returns?”
But Aequitas had no trouble lining up many others. “They knew how to wine and dine and use their jets,” recalls Lochrie. “I can’t tell you how many times they called us and said, ‘Do you want to take the jet down to Vegas or L.A.?’”
“We just said, ‘Regulators don’t allow us to take soft dollars,’” he says, explaining that, “As an RIA, I have a fiduciary duty to you. If I get paid by anybody other than you, I’m creating a conflict of interest.” (The SEC’s newly adopted customer relationship summary, or Form CRS, would no longer define RIAs as fiduciaries but would still require them to say, “When we act as your investment advisor, we have to act in your best interest and not put our interest ahead of yours.”)
But other RIAs weren’t so scrupulous. “Aequitas had junkets going all the time which attracted a lot of direct investors and fund managers,” he says.
It wasn’t just the fun times that attracted these RIAs. The industry is full of small players who often started out as one-man shops headed by brokers who fled the big wirehouses like Merrill Lynch and UBS. One reason, say those familiar with the business, is that the pressure to push product from their parent firms and the sharing of commissions created an environment that they felt often didn’t benefit themselves or their clients.
But RIAs are also facing pressures of their own. In a continuing hot market, say advisors, end investors want to pay lower fees while demanding high returns. Aequitas appeared to offer a way to solve both of those problems.
The RIA fee structure is typically based on assets under management, which rewards client acquisition. Aequitas promised to help. “They came to us and said, ‘We think you want to grow,’ and for us in the 2012-to-2014 time frame, we did want to grow,” says Lochrie. “They said, ‘We are going to loan you money to grow.’”
Those loans, however, came with strings attached. To get the money, the RIA had to invest in Aequitas’ products, and they were offered huge commissions to place the Aequitas notes, he recalls. “If I get paid by anybody but my client, that’s a conflict,” Lochrie explains.
Some of the RIAs ended up deeply tied to Aequitas. For example, Private Advisory Group sold 68 percent of the company to Aequitas to triple its assets under management through buying another RIA called Strategic Capital Group, according to a report in The Oregonian, Portland’s daily newspaper. That firm had placed a quarter of its assets, or $110 million, in Aequitas notes.
Chris Bean, a partner at Private Advisory Group, did not return a call for comment. But his firm, which recently settled one of the class-action suits, wasn’t alone.
Other RIAs that got embroiled in Aequitas include Concert Wealth Management, a firm created by several mergers that was once said to run $2 billion, and the $2 billion CLA Wealth Advisors, which owned an advisory business jointly with Aequitas CEO Jesenik.
Concert Wealth, which had been part of the Aequitas network, was sold to Sowell Management Services, an RIA from Little Rock, Arkansas, for an undisclosed amount in 2016 after the SEC fined Concert and founder Felipe Luna $180,000. The San Jose firm and its founder agreed to settle charges that they solicited investments in unregistered offerings using materially misleading private placement memoranda. They did not admit or deny the charges.
Ponzis are often affinity scams. “It is one of the main reasons that you see people so willing to trust the claims that they're being told about by other investors. Whether it's a church, a religious group, an ethnic group, just a common organization, the schemers use that common link with these people to give the scheme an aura of trust and legitimacy,” says Jordan Maglich, a Florida attorney who runs the website Ponzitracker, which details all the pending cases. “Especially in these religious groups, you have the person who's being sold these investments thinking, ‘Well, yeah, if my pastor is involved, how could he ever screw me? He would never do that to me.’”
Aequitas co-founder Oliver did use his church bona fides to gain investors’ trust, according to lawyers and local advisors. But if the plaintiffs in the class-action case against the two RIAs are any indication, the affinity group in this case was simply retirees looking for safe, low-risk investments. With interest rates hovering near zero since the financial crisis, traditional conservative investments, like bonds, have lost their appeal, which made Aequitas’ high-return promissory notes more attractive.
“People are more willing to let their guard down when there’s promises of above-average returns,” says Maglich. “‘This is safe, this is guaranteed.’ All these are hooks for people in retirement.”
Offers of high investment returns with little or no risk and overly consistent returns are among what the SEC identifies as Ponzi scheme red flags.
Aequitas also got help from TD Ameritrade, which “recommended and referred investors to financial advisors for the purpose of purchasing Aequitas securities,” according to the class-action complaint. “Ameritrade also served as custodian for certain Aequitas securities. Ameritrade customers purchased more than $140 million in Aequitas securities, with Ameritrade’s assistance. By contract, Ameritrade profited handsomely from its customers’ purchases of Aequitas securities.” Ameritrade took a 25 percent cut of all the advisor fees from customers it referred to advisors, who also paid Ameritrade for the client referrals, according to the complaint.
“We had Ameritrade come in and say this is the best deal that can ever be,” says Lochrie. “They were the custodians that gave Aequitas a lot of credibility that it didn’t deserve.”
“These investment advisors were sort of handed the clients from Ameritrade,” says one lawyer familiar with the class-action lawsuit. Ameritrade, like the accountants and lawyers who settled the lawsuit, did not admit or deny wrongdoing.
“We have a program through which we make referrals to independent registered investment advisors to individual investors who request them, but we continue to deny the allegations against us,” said an Ameritrade spokeswoman. “We have agreed to settle the litigation without admitting to any wrongdoing, and are pleased to put the issue behind us.”
It’s unusual for Ponzi victims to get such a lucrative settlement; typically, the perpetrators have little money left. But Oregon securities law doesn’t require plaintiffs to prove defendants had knowledge of the crime — making it possible to go after deep-pocketed law firms, accountants, and brokers.
Oregon has one of the most investor-friendly securities laws of any state, according to Keith Ketterling, an attorney with Portland law firm Stoll Berne, which represented investors in the class-action suit.
In contrast to federal securities laws, under Oregon's securities law, victim plaintiffs do not have to show that the defendants were aware of the fraud or somehow were negligent in uncovering it. All plaintiffs in this case had to show was that there were misrepresentations by Aequitas, and anyone who signed off on those could be held liable, according to an attorney familiar with the case.
Regardless of whether they knew what Aequitas was doing was illegal, the brand names clearly helped lend Aequitas an aura of respectability. “When you are talking with an investment advisor who you assume knows a lot about what he's trying to sell you, and he's trotting out these household names that you know and respect and certainly wouldn't be complicit in any scheme to defraud you, then certainly it just enhances the aura that the schemer is trying to sell you,” notes Maglich.
Moreover, he says, many “successful” Ponzi schemes are based on “people selling something that supposedly only they know how to do.” Complicated notes like those from Aequitas would fit this category. “People who are too afraid or don't want to ask questions get drawn into it,” he says. Someone positions himself as an investment guru, saying, “‘We can deliver these returns,’” he explains. “But he can't tell you how he does it.”
Yet despite the revelations surrounding Aequitas, RIAs have likely not seen the last of such troubles. If the past is any indication, Ponzi cases are likely to increase whenever the next market downturn hits.
In 2016, the year Aequitas unraveled, 59 Ponzi schemes were uncovered in the U.S., at an average size of $40.1 million, according to Ponzitracker. At $350 million, Aequitas was the largest outside of hedge fund Platinum Partners, which was alleged to be running a $1 billion Ponzi. (While Platinum’s principals were recently convicted of securities fraud, the Ponzi charges did not stick.)
The number of detected Ponzi schemes declined last year to 47 — the lowest in at least ten years — and about 25 percent lower than the number in 2017. About $1.6 billion in investor money was put into these schemes, the lowest total since 2014.
But Maglich isn’t comforted by the low numbers, which he suspects are due to today’s frothy market environment. As investors learned during the implosion of the Madoff Ponzi, it often takes a downturn for fraud to be discovered.
“Just putting together the data year after year, my theory is that the emergence or discovery of Ponzi schemes is a lagging economic indicator,” he says.
Discussing the explosion in Ponzis discovered around the 2008 financial crisis, he explains that a lot of investment advisors were telling people the investments “were safe, there were these guarantees,” but once other investments were “getting killed,” he surmises, people turned to their “safe” investments and tried to pull the money out. “They would get stymied for a while and eventually that one would go bust because the outflows exceed the inflows.”
Today, “with the market doing so well over the last three to five years, you're seeing the lowest number out there being discovered,” explains Maglich, who says that is a good reason to remember that “there's no substitute for due diligence.”
“A lot of times people are willing to either look past some of the red flags that come up because you're dealing with a registered investment advisor who's got a bunch of letters after their name,” he says. “In hindsight, when everything falls apart you say, ‘Man, this just ticked off the boxes with all these different red flags, but I just went along with it.’”
The problem with a Ponzi scheme is that there is no way out — even though some Ponzis may start out as legitimate companies. “They find that either the business was bad and they don't want to admit it and so they try to fill a hole by bringing new money in,” says attorney Phelps, who is the author of Ponzi-Proof Your Investments: An Investor's Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams.
But, she adds, “they don't have an underlining legitimate business that's going to support the returns they've made, and so they have to keep bringing new money in, and it slowly morphs into a Ponzi scheme.”
Since Aequitas had been in business since 1993 and the Ponzi scheme elements first appeared in 2011, that trajectory may well have been the case.
But in the end, it didn’t matter. “Courts have found that regardless of the seemingly legitimate nature of the operations, businesses associated with alleged Ponzi schemes are illegitimate due to the use of defrauded investors’ funds,” according to the Aequitas receiver’s report, which added, “Many, if not all, of the Aequitas operating companies and portfolios lost money (after accounting for bad debt and the cost of investor capital).”
“Ponzi schemes are doomed because their funding requirements increase geometrically over time,” the report continued. “Consequently, there are not many exit strategies for the person running a Ponzi scheme. Ultimately, the perpetrator will have to find an extraordinary investment that pays off handsomely in order to make sufficient money to cover the fraud — or fail.”