(Bloomberg) -- A former Jefferies Financial Group hedge fund manager pushed back on a fraud lawsuit accusing him of knowingly investing more than $100 million of the fund’s money in a Ponzi-like scheme involving water machines.
Jordan Chirico, former portfolio manager of 352 Capital, part of Jefferies’ Leucadia Asset Management, on Monday asked a judge to dismiss the suit 352 filed against him in July. He said the fund failed to allege that he knew of any wrongdoing during initial purchases of bonds issued by WaterStation Management, and that Leucadia authorized all of the investments in any case.
“Even shrewd and sophisticated investors like Mr. Chirico can, through no fault of their own, be victimized by unscrupulous actors,” his lawyers said in the motion, adding, “Leucadia’s failure to properly investigate and verify the unsubstantiated and stigmatizing allegations with which it has forever branded Mr. Chirico is despicable.”
Jefferies declined to comment on the filing. Neither Chirico nor his lawyers responded to requests for comment.
WaterStation, its owner Ryan Wear and several other people associated with the company were also sued by 352. Wear also didn’t respond to a request for comment.
Monday’s filing offers Chirico’s first detailed response to 352’s allegations. Bloomberg News reported last month that Chirico is facing a criminal probe by Manhattan federal prosecutors. That investigation is at an early stage and may not result in charges.
Personal Investment
In its suit, 352 said Chirico directed the purchase of a large quantity of bonds issued by WaterStation, which claimed it operated and franchised thousands of filtered water vending machines and was raising money to buy more.
“Instead of purchasing and operating water machines, WaterStation Management used the bond proceeds primarily to pay ‘franchisees’ their guaranteed returns on their ‘investment,’ or to buy out franchisees who had raised complaints about the business — a classic Ponzi scheme,” 352 said in its complaint.
According to 352, Chirico knew these machines didn’t exist but put 352’s money in the scheme in part to recoup his own personal, undisclosed $7 million investment in a WaterStation franchise.
Chirico said that all decisions to purchase WaterStation bonds were subject to review and authorization by Leucadia executives. He accused them of a “misguided attempt to assign blame.”
The former portfolio manager said he invested in WaterStation machines through a company he formed called C3 Capital, the existence of which he disclosed to 352 in 2020. He said he sold his machines to a company controlled by Wear in 2022 for close to what he originally paid for them.
But he said 352 failed to allege that he “knew or should have known that anything was amiss” at WaterStation at that time.
Chirico said Wear admitted to him in late January that revenue that had been attributed to water machines and used for bond repayment was actually coming from other food and beverage vending machines. According to his motion, that was the first time that Chirico had knowledge of the alleged scheme.
Investment Oversight
After learning of the alleged fraud, Chirico said he negotiated modifications to underlying lending documents that included revised covenants agreeing that Wear wouldn’t engage in day-to-day management of WaterStation. These negotiations and modifications were subject to Leucadia’s oversight, he said.
According to Chirico, Leucadia also authorized an agreement in February that specifically notes that “a significant portion of traditional vending machines (rather than water vending machines) and certain of the reported data and characteristics of such machines contained inaccuracies.” In its suit, 352 claims Chirico authorized that agreement.
In its suit, 352 accused Chirico of waiving several events of default and amending the bond documents so that WaterStation could withdraw bond proceeds but bondholders couldn’t access the collateral, rendering the fund’s investment totally unsecured, according to 352. But Chirico said these documents were executed by Leucadia with full knowledge of the waivers and amendments.
Chirico was hired by Leucadia in 2020 because he had a “demonstrated track record of success,” his lawyer said. 352’s suit has now seriously damaged Chirico’s “heretofore sterling professional record and personal reputation.”
Chirico, joined restaurant chain FAT Brands Inc. as head of capital markets in July but left weeks later to focus on defending himself against 352’s suit, Bloomberg reported at the time. In the meantime, Jefferies started to wind down trading positions at the hedge fund.
A Washington state court judge placed WaterStation into receivership in May and removed Wear as manager in August.
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