(Bloomberg) -- A Jefferies Financial Group hedge fund is attempting to claw back millions in compensation from a former portfolio manager it claims poured more than $100 million in a fraudulent scheme.
Jefferies’ 352 Capital on Monday filed a revised complaint against Jordan Chirico in Manhattan federal court, expanding on its allegations that, when he purchased bonds issued by WaterStation Management, he knew the Seattle-based water vending machine company was engaged in a fraud.
Calling Chirico a “faithless servant,” 352 also added a demand that he disgorge any compensation paid to him from September 2022 until his June 2024 termination. The fund said he was paid a total of around $5.3 million since he first joined 352 in May 2020.
The fund, which is part of Jefferies’ Leucadia Asset Management arm, first sued Chirico and others in July. Chirico moved to dismiss the original complaint earlier this month, arguing that 352 failed to show that he was aware of any wrongdoing at WaterStation and suggesting he himself was a victim.
Chirico didn’t immediately respond to a request for comment. He will have to file another motion if he wants to challenge the revised suit. Jefferies also didn’t respond to a request for comment.
Federal Investigation
According to both the original and revised complaints, WaterStation issued bonds that it claimed would be used to finance the purchase and operation of thousands of filtered water vending machines. The company allegedly falsified purchase records for these machines but actually directed proceeds from bond purchases mainly to pay or buy out “franchisees,” a group which 352 claims includes Chirico.
WaterStation and Chirico are also at the center of a Justice Department investigation. In a related civil lawsuit filed in New York state court between Chirico and 352 over legal fees, Chirico’s lawyers disclosed that he was “cooperating” with the Manhattan US attorney’s office and had participated in voluntary interviews.
WaterStation, its founder Ryan Wear and several others were sued by 352 as well. A Washington state court judge placed WaterStation into receivership in May and removed Wear as manager in August. Last week, US District Judge Valerie Caproni in Manhattan stayed 352’s suit as to WaterStation and two other entities, noting they were part of a federal bankruptcy proceeding in Texas.
Wear didn’t respond to a request for comment.
Chirico said in his motion to dismiss that every investment in WaterStation bonds was approved by higher-ups at Leucadia and that his $7 million personal investment in a water machine franchise ended long before the alleged scheme began.
In its revised suit, 352 pushed back on many of Chirico’s contentions, stressing that he acted “unilaterally” in making his investments. The fund also claimed for the first time that Chirico’s ties to WaterStation’s former chief financial officer, Tyler Sadek, whom it described as a “close personal friend” of the former portfolio manager, was a factor in his investment in the company’s bonds.
A lawyer for Sadek didn’t respond to a request for comment.
‘Commercial Bribes’
Fresh allegations were also made about Chirico’s relationship with REVL Securities, the boutique investment bank that acted as collateral manager for the WaterStation bonds. In its original complaint, 352 alleged that REVL discovered that thousands of WaterStation machines didn’t exist and that the company had been fraudulently reporting revenue generated by other vending machines but failed to report its findings to the bond trustee.
On Monday, 352 accused REVL of choosing to help cover up the fraud due to its “longstanding personal and professional relationship” with Chirico. According to the fund, Chirico knew the principals of REVL for at least a decade he joined 352, and the firm advised him on his personal investment in WaterStation. The fund said REVL responded to the fraud by giving WaterStation 90 days to rectify the situation but then took no action after the deadline passed.
A lawyer for REVL declined to comment.
The fund claims Chirico’s WaterStation investment was a conflict of interest that violated his employment agreement. Chirico denied that in his motion to dismiss, saying that he disclosed to Leucadia his ownership of C3, the company that held that investment. According to 352’s revised suit, Chirico claimed in his disclosure that C3 was outside his “coverage industry sector,” even though he later invested the fund’s money in WaterStation.
According to the revised suit, Chirico also accepted a string of “commercial bribes” from Wear to keep him in the alleged scheme. These allegedly included a $1.9 million promissory note with a 15% interest rate issued to C3 in September 2023 and a $3.6 million wire transfer intended to pay off a US Small Business Adminitration loan Chirico had taken out to make his personal investment in WaterStation.
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.
The case is 352 Capital v. Wear, 24-cv-05102, US District Court, Southern District of New York (Manhattan).
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