PORTLAND, Ore. (AP) — Chris Bean has spent much of February breaking the bad news to his clients: The stunning collapse of Aequitas Capital Management will almost certainly cost them a considerable portion of the money they invested in the Lake Oswego company.
These are painful mea culpas for the 41-year-old Bean. Private Advisory Group, his Redmond, Washington-based investment firm, has 330 clients invested in Aequitas, more than any other financial adviser in the country. There’s the 86-year-old woman in Rancho Mirage, California, who says she has a third of her assets riding on Aequitas. There’s the retired corporate lawyer in the Bay Area who fears his $600,000 has gone up in smoke. Bean even got his own 65-year-old mother invested in the company.
“I cannot begin to tell you how sorry we are in having to share this news and how angry and disappointed we are in Aequitas,” wrote Bean in one recent letter to an investor.
In an interview Feb. 18, Bean accused Aequitas executives of repeatedly misleading him and portraying a rosy picture of the company’s worsening financials.
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“The last three weeks have been devastating,” Bean said. “I made investment recommendations that seemed prudent at the time but have proven to be disastrous. I was lied to by people I trusted.”
Bean offers one of the first inside looks at what is shaping up to be one of the largest Oregon investments scandals in a generation. While not part of Aequitas’ inner circle, he and his firm were part of a national network of investment advisers that played a crucial role in connecting Aequitas to the capital it needed.
In all, investors bet nearly $600 million on Aequitas’ diverse array of subprime lending strategies. It’s unclear how much they’ll recover.
Aequitas executives declined to comment for this story.
As first reported by The Oregonian/OregonLive, Aequitas suffered a debilitating cash shortage that has forced it to lay off 80 of its 125 workers. It has defaulted on payments due to investors. It has confirmed in letters to customers it is considering bankruptcy filings.
The U.S. Securities and Exchange Commission and the Consumer Financial Protection Bureau have launched separate investigations of the company. Brian Rice and Scott Gillis, two of the company’s six senior partners, resigned in recent weeks. The company’s general counsel just quit. Gillis was the second Aequitas chief financial officer to depart in less than a year.
The chaos at Aequitas is particularly awkward for Bean. An Aequitas affiliate bought a controlling interest in his firm in July 2014, he confirmed. That fact, Bean acknowledges, has raised questions among some of his investors about potential conflicts of interest.
Bean insists Aequitas kept him in the dark about its true financial condition. He said his firm will sue Aequitas, as will his investors.
As recently as January, Aequitas continued to accept new investor money. Two Portlanders, working through another investment firm, placed $574,000 in an Aequitas fund on Jan. 7. Bob Banks, the investors’ Portland lawyer, provided paperwork to The Oregonian/OregonLive documenting the investment.
“It is absolutely outrageous that a financial adviser would put important client retirement money into promissory notes issued by a company that was already on the ropes,” Banks said.
In contrast to the current uncertainty, Aequitas was full of promise and confidence in October, when the company hosted its “Fall Summit” at the posh Allison Inn and Spa in Oregon’s wine country.
About 200 people, most of them investment professionals from around the country, attended the overnight event, with Aequitas picking up the tab. The news about the economy was mixed. But Bob Jesenik, Aequitas’ chief executive, was expansive about the company’s future, according to Bean and Aequitas’ own PowerPoint presentation shown at the gathering.
“There was not the slightest red flag,” Bean said. “It was full-speed ahead.”
Aequitas, as Jesenik liked to say, dealt in “real assets in the real economy.” As mainstream banks continued to retreat from lending, Aequitas was investing in new alternative sources of credit, it was lending money itself and investing in select businesses and it was buying existing consumer debt.
Aequitas owns CarePayment, a company that buys debt owed by patients to hospitals. In the era of catastrophic health insurance coverage, hospitals find themselves struggling to collect the money patients owe in deductibles and co-pays. CarePayment, widely seen as the gem of Aequitas’ portfolio, provides consumers with that “gap” financing and works out a deal with the hospital to split the loan proceeds.
Aequitas also buys consumer debt owed on motorcycles. It provides funding to a Bay Area company that offers debt consolidation loans to consumers. And it continues to collect tens of millions of dollars’ worth of student loan debt owed by former students of Corinthian Colleges.
In a sense, Aequitas had hit upon a fitting strategy for America circa 2015, where the gulf between haves and have-nots continues to grow. Aequitas uses money from wealthy investors to fund and buy loans owed by the increasingly hard-pressed middle-class and the poor.
The plan hit a major snag when Corinthian collapsed last May and the government charged the company with predatory lending practices. Aequitas to this day is collecting on the student debt even after a federal judge ruled that the loans violate two federal consumer protection laws.
Despite holding more than $100 million in Corinthian student loans, Aequitas executives were still predicting big growth to the group of executives gathered at The Allison in Newberg. They spoke of the Aequitas “vision” in which the company itself would quickly quadruple the size of its portfolio to $4 billion by 2018 while its investment advisers would contribute $6 billion in additional funding.
Finding the money
To fund this heady growth, Aequitas needed a huge slug of capital. And that’s where the investment advisers came in.
Aequitas offered an unusually sweet deal, offering investment advisers what it said was a safe and high-yielding alternative investment. Its private notes paid about 8-12 percent, an outstanding return in an era when many fixed-income investments were paying less than 1 percent.
Aequitas also offered juicy commissions — 2 percent and up — on every dollar the advisers sent to Aequitas. The Lake Oswego company even offered loans and other financing to investment firms in case they wanted to buy another firm or expand.
“We have what’s called the Aequitas way and that is really all about building mutually beneficial relationships — true win-win partnerships,” said Keith Gregg, then-head of Aequitas Capital Partners, in a June 2014 interview with Opportunist Magazine. “Ultimately, the client wins by accessing a higher income producing investment, their adviser wins through access to capital for growth and better products for high-net-worth investors and Aequitas wins through adviser relationship and assets from wealthy investors.”
Gregg has since left the company.
Some recoiled at the Aequitas pitch. The notion of any sort of financial quid pro quo with Aequitas, in the form of fat commissions or loans, struck them as an obvious conflict of interest and a violation of their fiduciary duty to their own investors.
Aequitas approached Stan Lochrie, co-founder of Etesian Wealth Advisors in Lake Oswego, about working together in 2014.
“They wanted to be a hard-money lender to registered investment advisers like us, so that we could buy other firms,” Lochrie said. “But it was clear that if you got money from them, you were to be compelled to sell the private notes and other Aequitas products. I said ‘no, I’ll never do that.'”
A three-way deal
Bean also rejected Aequitas’ commission payments, he said. But he wasn’t averse to getting more closely involved with the company. In July 2014, he cut a deal that gave an Aequitas affiliate company a majority equity stake. Aspen Grove Equity Solutions, a company controlled by Aequitas and its executives, ended up with 68 percent of Private Advisory Group.
It was a complex transaction. As part of the deal, Bean’s company agreed to absorb more than $400 million in assets under management from another Puget Sound-area investment firm, Strategic Capital Group.
It seemed like a good deal for Bean. Though no money changed hands, the merger tripled Private Advisory Group’s portfolio to more than $600 million.
But the transaction also significantly increased the firm’s exposure to Aequitas, which until then had been relatively minor holding. Strategic Capital had for years worked closely with Aequitas. More than $110 million of the investment assets that shifted from Strategic Capital to Private Advisory Group were in private notes or other Aequitas investments, Bean said.
Why Aequitas and Strategic Capital wanted to do this deal is unclear. Neither company would comment about this deal or anything else. But the answer may lie in what happened two months later: Strategic Capital was enveloped in a cloud of bad publicity in September after the Securities and Exchange Commission sanctioned the firm and its co-owner, Gary Price.
The commission issued a cease and desist order accusing Strategic Capital and Price of engaging in more than 1,000 improper trades that benefited Price’s companies without adequate disclosure to clients.
Descent into disarray
As far as Bean and many of his clients were concerned, the July 2014 transaction worked beautifully. Aequitas didn’t interfere with daily operations. And the Aequitas investments paid off on time like clockwork.
Private Advisory Group put another $200,000 of its clients’ money into the Aequitas private notes on Dec. 29, Bean said.
Then came January, when everything changed.
Aequitas informed Bean that it didn’t have the money to repay a handful of his firm’s clients as their private note investments came due.
The news terrified Bean, who quickly demanded a face-to-face meeting. Even at that tense Jan. 13 gathering at Aequitas’ Kruse Way headquarters, Bean said, Brian Rice and Brian Oliver, Aequitas partners and senior executives, reassured him the company was experiencing merely a temporary cash-flow squeeze that it would overcome.
A week later, Aequitas went into full crisis mode, firing employees and eventually bringing in a high-powered consulting firm to consider bankruptcy or liquidation.
Bean fears his firm could end up collateral damage as the Aequitas disaster proceeds. “We’ve lost some big clients,” he said. “We’ll keep fighting. We’ve got nothing to hide. We want the truth to come out.”
Information from: The Oregonian, http://www.oregonlive.com