Aequitas Lays Off More Employees in the Wake of Faulty Subprime Bets

In the second round of layoffs, Aequitas Capital Management announced that it is letting of even more workers in the wake of financial problems. A week after disclosing that it would lay off about a third of its workers, the investment firm told employees that almost everyone else would have to go. Workers were given 60 days notice. A spokesperson for Aequitas explained that the Oregon-based investment firm was modifying its strategy and changing its business model.

The firm which manages investments for rich individual investors appears to be having serious cash flow issues. This is a definite about-face for a company that once held $500 million in assets under management. Not only was it a challenge for Aequitas to make payroll during the first month of this year, but also the firm angered investor clients last year when it told them that it couldn’t meet scheduled payouts because of liquidity issues. Company officials claimed that the delays were unexpected because of “incoming investments” and “timing mismatches involving cash flow.”

Over the last few years, the investment firm has become more focused on subprime credit to purchase consumer healthcare debt, student debt, and motorcycle loans. In total, investors have bet close to $600M on Aequitas’ subprime lending strategies.

Aequitas was also connected Corinthian Colleges Inc., which has been accused by federal regulators of using deceptive and predatory tactics to get students to enroll and borrow money for tuition. According to The Oregonian, a firm affiliate purchased over $500M in Corinthian student loans at a reduced rate and charged the college chains millions of dollars in fees for its assistance. The company had set up the Campus Student Funding LLC to purchase the debt from Corinthian.

This allowed the national chain of trade schools to stay afloat and become a key player in a student loan program that regulators said helped lead thousands of students toward default. After Corinthian failed and closed its campuses, students were left with incomplete degrees and pricey loans. Even now Aequitas is collecting on this student debt despite the fact that a federal judge has said the loans were in violation of federal consumer protection loans. (Firm officials have said in written statements that they became involved with Corinthian because they thought that it had a good relationship with the U.S. Department of Education.)

Meantime, there has been fallout among other advisors. In one example, published in The Oregonian, Private Advisory Group owner Chris Bean said that he has spent most of this month notifying clients—330 of whom invested in Aequitas—that they will more than likely lose a considerable amount of the funds they invested. Bean, who was interviewed by the paper, claims that the firm’s executives mislead him by making it seem as if the company wasn’t doing so badly even though it was in financial trouble. Bean said that as a result of being lied to, he made certain investment recommendations to clients.

Bean had already been dealing with questions of possible conflict of interest because an affiliate of the company purchased a controlling interest in Private Advisory Group almost two years ago. Bean says his firm will sue as will his investors. The firm purportedly kept bringing in investor funds as early as the beginning of the year.

Investors purportedly thought that they were getting high-yield, safe alternative investments with Aequitas, especially as its private investment notes paid around 8-12% in returns. The firm offered commissions of at least 2% on every dollar that it received. It also offered investment firms financing for expansion or to purchase another firm.

The U.S. Securities and Exchange Commission and the Consumer Financial Protection Bureau are conducting separate probes.

The SSEK Partners Group is a securities fraud law firm.