(Bloomberg) — A former Jefferies Financial Group hedge fund manager who was sued for allegedly defrauding the fund out of more than $100 million is also facing a federal criminal probe.
Most Read from Bloomberg
Manhattan federal prosecutors are investigating Jordan Chirico and allegations by the fund, 352 Capital, that he knowingly invested its money in a Ponzi-like scam, said a person familiar with the matter, who asked not to be identified discussing the probe. Chirico has received a grand jury subpoena as part of an investigation, according to court papers filed in August in a separate civil matter involving him and 352.
The government probe marks an escalation in scrutiny of Chirico’s management of 352, which was part of Jefferies’ Leucadia Asset Management arm. Jefferies started winding down the fund over the summer, and 352 sued Chirico and others, alleging fraud, in July.
According to the suit, Chirico directed the purchase of a large quantity of bonds issued by WaterStation Management, a company that claimed to operate thousands of filtered water vending machines. His former employer claims Chirico knew these machines didn’t exist but continued to put 352’s money in the scheme in part to recoup his own investment.
Water Machine Franchises
The investigation may not result in charges. Neither Chirico nor his lawyers responded to requests for comment, but they have said in court filings that he was wrongfully terminated and have called the allegations in the 352 suit unsubstantiated.
The filings that referenced an investigation were submitted by Chirico and 352 as part of a Delaware court fight over whether his Leucadia employment agreement requires the fund to cover the former portfolio manager’s legal costs in both the fraud suit and the criminal probe.
The Manhattan US attorney’s office declined to comment on the existence of an investigation. Jefferies also declined to comment.
According to the 352 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, 352 says.
“Instead of purchasing and operating water machines, WaterStation 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.
Conflict of Interest
The fund claims those bought-out franchisees included Chirico and his wife, who allegedly invested $7 million of their own money in WaterStation franchises. This was a conflict of interest Chirico didn’t disclose to 352 before he started investing the fund’s money, according to the suit.
Chirico, who joined Leucadia in 2020, allegedly first bought WaterStation bonds with 352 funds in April 2022, investing $15 million. In December 2023, Chirico doubled down on 352’s investment in WaterStation, despite knowing it was a fraud, the fund says. He allegedly further increased 352’s investment to nearly $107 million over the next couple of months.
Leucadia fired Chirico in early June, according to the lawsuit. He then joined restaurant chain FAT Brands Inc. as head of debt capital markets. He stepped down from that job weeks later, shortly after 352 filed its suit on July 3. FAT said in a statement at the time that Chirico was leaving to focus on defending himself from 352’s suit.
Several other investors have sued Everett, Washington-based WaterStation and its founder, Ryan Wear. One group suing in Washington state court says the company raised about $100 million from hundreds of unsuspecting investors by promising returns of between 12% and 20%. Investors say they were told their funds would be used to purchase water vending machines at retail locations across the US.
Neither Wear nor WaterStation responded to messages seeking comment. A Washington state court judge placed the company into receivership in May and removed Wear as manager last month.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.