Jefferies-Backed Fund Accuses Ex-Portfolio Manager of Fraud

Jefferies headquarters in New York. (Jeenah Moon/Bloomberg)

(Bloomberg) -- A hedge fund that’s part of Jefferies Financial Group sued its former portfolio manager, claiming he orchestrated an investment of more than $100 million in a Ponzi-like scam.

The fund, 352 Capital, filed a lawsuit last week against Jordan Chirico, saying he directed the purchase of a large quantity of bonds issued by a company that claimed to operate thousands of filtered water vending machines. According to the suit, Chirico knew these machines didn’t exist but put 352’s money in the scheme in part to recoup his own investment.

Chirico, who earlier this month joined restaurant chain FAT Brands Inc. as its head of debt capital markets, referred comment to his lawyer. The lawyer, Bob Gage, didn’t immediately respond to a request for comment.

The water machine company, WaterStation Management, and several people associated with it, including founder Ryan Wear, were also sued by 352. Neither Wear nor WaterStation could be reached for comment.

According to the suit, WaterStation claimed that it both owned and franchised its water machines. The company purported to be issuing bonds to purchase and deploy more machines, including for franchisees.

‘Classic Ponzi Scheme’

Chirico, who joined Jefferies’ Leucadia Asset Management in 2020 and became portfolio manager of its 352 fund, allegedly 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.

The bond proceeds were to be used only to buy new water machines, which were to be collateral for the securities. But by August 2023, the collateral manager found out that thousands of the water machines the company had supposedly purchased with the bond proceeds did not exist. 

“Instead of purchasing and operating water machines, Water Station Management used the bond proceeds primarily to pay ‘franchisees’ their guaranteed returns on their ‘investment,’ or to buy out franchisees who had raised complaints about the business — a classic Ponzi scheme,” 352 said in its complaint. 

“Because Chirico was owed money in connection with his ‘investment’ in the scheme, and his friends and family were likewise ‘investors,’ he stood to directly, personally benefit from these payouts,” 352 said. The fund claims a company controlled by Wear bought Chirico’s franchise investment for $7.2 million using bond proceeds.

Doubled Down

According to the suit, revenue that WaterStation had reported as coming from the machines was in fact being generated by other food and beverage vending machines owned by a separate Wear company. The company also allegedly falsified purchase orders and invoices.

In December of 2023, Chirico doubled down on 352’s investment in WaterStation, buying the company’s remaining bonds, despite knowing it was a fraud, the fund says. Chirico allegedly further increased 352’s investment to nearly $107 million over the next couple of months. 

He also waived several events of default and amended the bond documents so that the proceeds could be used for anything and that bondholders couldn’t access the collateral, rendering the fund’s investment totally unsecured, according to 352. 

US Bancorp, the bond trustee, issued default notices to WaterStation starting in May for failing to make interest payments.

The case is 352 Capital v. Wear, 24-cv-05102, US District Court, Southern District of New York (Manhattan).

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