Aequitas trial: Forensic accountant testifies about 'badges of fraud'

A forensic accounting expert who was hired in 2016 to help wind down Aequitas testified in federal court this week that the firm's insolvency began in July 2014, and continued until its collapse in 2016.

Bradley Foster was a member of the FTI Consulting team that Lake Oswego's investment firm had hired. He testified in the criminal case of three former Aequitas execs -- Robert Jesenik Andrew MacRitchie Brian Rice -- that was held in U.S. District Court, Portland. The three are facing multiple charges of conspiracy, money laundering and mail and wire fraud.

Three other executives have pleaded guilty to charges similar to these and have either already testified or will soon do so for the government.

Foster described to jurors the nine 'badges' of fraud that he found in his forensic investigations that showed Ponzi-like finance, where new investors' money was used to pay existing ones. According to his testimony, among them were:

Financial misrepresentation, including the misstatement or assets and collateral.

Michael Simon, the judge, clarified to jurors Foster's lack of opinion on whether fraud had occurred or if three defendants were knowingly involved in a Ponzi Scheme. He pointed out that no defendant is accused in the indictment of participating in a Ponzi scheme.

Foster testified that of the $346 million raised in cash, $211 was used to pay investors. Aequitas tear sheets, one-page summaries of the fund shared with investors, showed that Aequitas Commercial Finance primarily used private note financing proceeds to buy receivables. These included hospital patient debts and student loans.

Aequitas liquidity problems were exacerbated by the bankruptcy of Corinthian Colleges in 2014. The firm stopped paying restitution to Aequitas and declared bankruptcy.

Foster testified in court that, of the $61 million in overhead expenses between July 2014 and February 2016, $40,6 million exceeded what was allowed based on a 2% fee charged to clients. Foster testified that the fee only covered $21.2 million of expenses.

Foster testified that the fee defined the guardrails. They could spend the money on anything they wanted but there were limits.

MacRitchie received $900,000, and Rice $500,000.

Foster also described the growth of a credit line from Aequitas Commercial Finance to Aequitas Holdings. Aequitas Commercial Finance was responsible for the majority of fundraising and borrowings by Aequitas. The loan was referred to by the term 'holdings notes' and covered cash shortages. Foster testified that when the debt grew to $180 millions, there was only $110 million in collateral.