WaterStation, the water vending machine company accused of operating a large Ponzi-like scheme by hedge fund Jefferies Group, may be forced into bankruptcy, after creditors filed involuntary bankruptcy petitions against the company, according to a report by the Wall Street Journal.
The move comes after Jefferies’ 352 Capital fund accused WaterStation, its founder, and a former portfolio manager of misappropriating more than $100m in bond proceeds as part of what it described as a “massive fraud.” However, 352 Capital is not directly involved in the bankruptcy filings, according to the report.
The involuntary bankruptcy petitions were submitted shortly after a judge in Washington state appointed a receiver to manage WaterStation. It remains unclear how these bankruptcy proceedings will affect the court-appointed receiver’s role.
Involuntary bankruptcies are uncommon, and WaterStation has a few weeks to respond to the petitions, according to court documents.
Neither the lawyers representing the WaterStation creditors nor the company’s founder, Ryan Wear, responded to requests for comment. Jefferies also declined to comment on the matter.
WaterStation and Wear have been named in multiple lawsuits, with 352 Capital filing a lawsuit in July. The hedge fund alleges that instead of using the bond proceeds to expand the business and purchase water vending machines as promised, Wear engaged in fraudulent activities. According to 352, most of the water machines claimed by Wear did not exist, and the bond proceeds were used to pay investors “too good to be true” fixed returns.
The lawsuit also targets former Jefferies portfolio manager Jordan Chirico, accusing him of directing the purchase of a large number of WaterStation bonds without disclosing his personal investments in the company or his financial ties to Wear. Chirico allegedly failed to disclose that Wear owed him $1.9m and that his friends and family owned WaterStation franchises, creating a conflict of interest.
According to court documents, 352 Capital claims that these undisclosed conflicts motivated Chirico to increase the fund’s bond positions with WaterStation, even as evidence of fraud emerged. Chirico, who was terminated by Jefferies in June, has denied the allegations and demanded that 352 cover his legal fees.
