(Bloomberg) -- A water vending machine business accused by a Jefferies Financial Group Inc. hedge fund of orchestrating a large Ponzi-like scheme may be forced into bankruptcy.
Creditors of WaterStation Management and two affiliates filed involuntary bankruptcy petitions against the companies on Aug. 27 in Texas. Jefferies’ 352 Capital fund isn’t involved in the bankruptcy filings but last month accused a former portfolio manager, WaterStation and its founder of misappropriating more than $100 million in company bonds as part of a “massive fraud.”
The petitions were filed days after a Washington state judge appointed a receiver to manage WaterStation. It couldn’t immediately be learned Friday how the involuntary bankruptcies in Texas could impact the receiver.
Involuntary bankruptcies are rare and WaterStation has a few weeks to respond to the petition, according to court documents. The Wall Street Journal earlier reported the involuntary bankruptcy petitions.
Lawyers representing WaterStation creditors that initiated the forced bankruptcy didn’t return messages Friday seeking comment. WaterStation founder Ryan Wear and his lawyers didn’t immediately return messages seeking comment. A Jefferies spokesperson declined to comment.
WaterStation and Wear have been named in several lawsuits, according to court records. 352 sued WaterStation and Wear in July, alleging the company and its founder didn’t use bond proceeds to grow the business and purchase water vending machines, as they claimed.
Wear claimed to operate thousands of water machines in locations across the US, but “It was all a fraud,” 352 said in court papers. The majority of the water machines didn’t exist and bond proceeds were being used to pay investors “too good to be true” fixed returns, the fund has alleged.
352 also sued its former portfolio manager, Jordan Chirico, who is accused of directing the purchase of a large quantity of WaterStation bonds. Chirico joined Jefferies’ Leucadia Asset Management in 2020 and was terminated in June, according to court documents.
The fund alleges that at the time of the transaction, Chirico didn’t disclose that he and his wife had already invested their own money in WaterStation franchises. Chirico also didn’t disclose that Wear owed him $1.9 million or that his friends and family also owned WaterStation franchisees, the fund has claimed.
The alleged conflicts “provided strong incentives to Chirico to maintain, and later increase, the 352 Fund’s bond positions with Water Station Management and continue to prop up the company even after it became clear that it was engaged in fraud,” 352 said in court papers.
Lawyers for Chirico didn’t return messages Friday seeking comment. Chirico has demanded 352 cover his legal fees and said in court papers that he was wrongly terminated on June 5.
The case is Water Station LLC, number 24-33924, in the US Bankruptcy Court for the Southern District of Texas (Houston).
©2024 Bloomberg L.P.