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Jefferies Sues Regional Bank Over Alleged Water Machine Scam
(Bloomberg) -- A Jefferies Financial Group hedge fund widened its legal fight to recover more than $100 million that its former portfolio manager invested in an alleged fraud scheme involving water vending machines.
Jefferies' 352 Capital sued Port Angeles, Washington's First Fed Bank last week in Seattle, claiming the First Northwest Bancorp subsidiary was aware of the alleged fraud. But the bank facilitated the scheme in order to prioritize repayment of its own loans to the machine company and its franchisees, 352 said.
The suit is the latest twist in the saga of 352's investment in bonds issued by WaterStation Management, which claimed to operate thousands of filtered water vending machines. According to 352, the Everett, Washington-based company used the money raised to pay guaranteed returns to franchisees and insiders in a 'Ponzi scheme,' as well as to repay loans to First Fed.
First Northwest disclosed the suit in a June 13 regulatory filing in which it said it strongly disputes the allegations and intends to 'vigorously defend against the claims.' In a Wednesday interview, First Fed Chief Executive Officer Matthew Deines said he felt there was 'no merit' to the suit against the bank.
'We are a 102-year old community bank,' said Deines. 'This is a Wall Street firm that is trying to recoup funds from this. We were a victim like many others.'
WaterStation could not be reached for comment. A Jefferies spokesman declined to comment.
The litigation began last year when 352, which is part of Jefferies' Leucadia Asset Management arm, sued former portfolio manager Jordan Chirico. The fund claimed that he conspired with WaterStation to have 352 buy bonds backed by thousand of machines that didn't exist.
Chirico has denied the claims. He has suggested in court filings that he was victimized by WaterStation and stressed that all of his investment decisions were reviewed and authorized. He accused his former employer of a 'misguided attempt to assign blame.'
The case was dismissed by a federal judge last month, but 352 re-filed its claims against Chirico and others in New York state court on June 9. Neither Chirico nor his lawyer could be reached for comment on the re-filed suit Wednesday.
According to 352's suit against First Fed, the bank had access to the machines' serial numbers so would have known they didn't exist. The bank was also in charge of holding the proceeds from the bonds in which 352 invested and facilitated their diversion to other loans.
The fund says bond proceeds were only supposed to be used to purchase more machines but instead some were used to repay First Fed's loans, to pay WaterStation insiders or retail investors. At its peak, WaterStation and its related companies owed First Fed $30 minion, according to the suit.
In its suit against Chirico, who joined 352 in 2020, the fund claimed he first invested $15 million of its money in WaterStation bonds in April 2022. At that time, 352 claims that Chirico and his wife had already invested $7 million of their own money in WaterStation franchises, a conflict he didn't disclose to his employer. He ultimately invested nearly $107 million of 352's money in WaterStation bonds, the fund claims.
The fund also sued WaterStation and several people associated with it, including founder Ryan Wear. Wear couldn't be reached for comment.
Last month, the Washington State Department of Financial Institutions brought regulatory charges against WaterStation, Wear and other executives.
--With assistance from Yizhu Wang.
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