“I have a feeling that we’re going to find that the compensation to RIAs for offering these products was substantial,” Banks says. “Why else would they do it? Selling Aequitas investments in 2015 and 2016 in retirement accounts was like selling tickets on the Titanic after it hit the iceberg.”
Despite that an Aequitas affiate owns a 68 percent of his firm, Bean claims that he rejected Aequitas’s commissions, but was attracted to Aequitas’s promises of high returns and their mostly clear track record. The firm even passed muster during Private Advisory’s due diligence efforts.
“We do onsite interviews, logic tests and interview management and rank-and-file staff,” Bean says. “We had multiple firms doing additional due diligence, but even the best due diligence can’t always identify fraud. In hindsight, we’ve hired a consultant firm to come back and audit our process, but I don’t know if we could design a due diligence process that would guarantee catching something like this.”
Bean expects his business to survive despite the collapse. Today, he’s doing his best to keep his clients up to date.
“Almost without exception they are thanking us for navigating this on their behalf, and they appreciate the open and honest communication,” Bean says. “The anger for the most part is where it should be, with Aequitas, who misrepresented themselves and were negligent, if not fraudulent, in reporting their financials.”
The disintegration of Aequitas Capital has been as sudden as it was unexpected. After growing into a $1.7 billion alternative asset manager specializing in buying bad educational, medical and consumer debt, the firm is now a skeleton of its former self.
The first sign of trouble came in July 2015, when private for-profit college administrator Corinthian Colleges shuttered its doors after Aequitas had bought $600 million in student loan receivables from Corinthian in 2011.
At the time of Aequitas’s investment, Corinthian’s loans were backed by the U.S. Department of Education, but the college system allegedly failed to maintain federal standards for non-predatory lending and debt management practices. Aequitas’s involvement allowed the schools to issue more than 100,000 new student loans. Today, many of the loans are in default, and the college system is under pressure to forgive others, with some students refusing to make payments.
However, through the fall of 2015, Aequitas allegedly assured investors that it was in good shape financially—it added several executives and opened a posh New York City office and continued to lead investments. It predicted that it would quadruple the size of its portfolio to $4 billion by 2018 and add another $6 billion in assets from advisors during a November 2015 conference.
“In the third quarter of last year, they said that they may have a cashflow timing issue,” Bean says. “That is what they said up until the day they acknowledged they were insolvent.”