$300 million allegedly bilked from investors

A week ago (March 10), the Securities and Exchange Commission filed suit against a Portland, Oregon, financial firm named Aequitas and three of its high-living, socially prominent executives. They are charged with running a Ponzi scheme that bilked 1500 investors of $300 million and probably more.

On Monday (March 14), one of Aequitas' financial units was supposed to have shown up in federal court in San Diego to face a suit by Solana Beach–based American Student Financial Group. The financial group says that Aequitas cheated it out of commissions it was to have received for providing loans that Aequitas bought, then sold to its investors, who were making 5 to 15 percent on the loans.

"The trial has been postponed," says Robert S. (Bob) Banks, Jr., a Portland securities lawyer who is representing desperate investors. Banks says he spends five hours a day talking with the investors, some of whom weep that they have lost everything. "Their stories are heart-wrenching," says Banks.

The story of Aequitas is one of colossal chutzpah, and more likely colossal ignorance. One of Aequitas' specialties was buying troubled loans, packaging them, and selling them to investors. It also sold notes to finance its operations. Because there was high risk, investors got high interest rates.

But Aequitas bought the troubled loans of an extremely troubled institution — Corinthian Colleges, a string of for-profit colleges, which the parent bought cheaply because the institutions were having difficulties. Aequitas told investors the loans were safe because Corinthian vowed it would buy back loans that were delinquent after 90 days.

But Corinthian went down in flames. In June of 2014 it ceased rebuying the defaulted loans. Why didn't Aequitas suspect that would happen?

In July of 2007, the California attorney general's office said Corinthian "engaged in a persistent pattern of unlawful conduct." Corinthian paid $6.5 million to settle allegations that it had engaged in false advertising. Also in 2007, the U.S. Department of Education seized records of a Florida campus. In 2013, the Securities and Exchange Commission and Consumer Financial Protection Bureau launched investigations of Corinthian. But as Banks points out, during these troubled times, Aequitas opened a posh New York office and spent a bundle to refurbish its Oregon digs.

To stay afloat, Aequitas allegedly kept selling packages of dubious paper and didn't tell investors of its troubles. By last year, almost all the money coming in the door went out the back door to pay off early investors — the classic Ponzi scheme. Last year, Corinthian went out of business, pushed greatly by the federal government.

Kevin Jasper, a San Diego lawyer, predicted that Aequitas would collapse 17 months before it did. Jasper said the bad Corinthian loans would drain Aequitas of $70 million. I could not reach Jasper.

In September of 2010, Aequitas announced that Bill Malloy, whose office is in La Jolla, would become an executive vice president of Aequitas Capital Management. Malloy, who says his family fortune goes back to the early 1800s, appears to be a venture capitalist in emerging tech companies, investing family money. Michael Esler, a Portland lawyer, says, “Based on my 45 years in securities litigation, I have a strong hunch [Malloy] was a money raiser" for Aequitas. Malloy did not respond to a phone call.

In January of 2014, William J. Ruh was named an executive vice president and managing principal of Aequitas. At the time he was named to the post, Ruh was chairman-elect, treasurer, and trustee of the Rancho Santa Fe Foundation. Earlier he had served as an officer of the Rancho Santa Fe Education Foundation. He was associated with Castle Creek, which invested in troubled banks. I was not able to locate Ruh.