Aequitas trial: Former compliance officer raised questions over use of funds

Former risk and compliance officer at Aequitas Capital Management recalls the first time she questioned the way the former Lake Oswego Investment firm used investor funds.

Jessica Cataudella, who started working at Aequitas as a CPA in 2014, hired a CPA to flag some transactions. The funds "went to pay redemptions, and the timing of this was very rapid," Cataudella said in court.

Cataudella, in her testimony, stated that the funds were not intended to be used to redeem previous investors but rather to invest them into receivables.

She was the eighth person to testify at the criminal trial for three former executives of the company, which collapsed last year. The trial before Judge Michael Simon at the U.S. District Court of Portland is expected to last for five weeks. Former CEO Robert Jesenik and former Chief Compliance Officer Andrew MacRitchie, as well as Executive Vice President Brian Rice have been indicted for multiple counts of conspiracy. If convicted, they could face decades behind bars.

The U.S. attorney's office claims that Aequitas executives and its marketing materials misled investors by claiming their money went to interest and redemptions for previous investors. In reality, it was used to pay Aequitas operating costs including payroll, private jets, and lavish retreats.

Compliance Officer Flagged Transactions

Cataudella worked for the Securities and Exchange Commission (SEC) in San Francisco and AssetMark Inc. as chief compliance officer, an investment adviser registered with the SEC. She is currently the director of compliance for Charles Schwab, Boston.

Vanessa DeHaan was Cataudella’s employee who took the stand as a witness last week. Cataudella provided more information on the efforts they made in May 2015 to flag specific transactions for MacRitchie. MacRitchie's response to Cataudella was that they only needed to confirm the loan agreements were in place and the filings for the transfers.

Cataudella said in court that she didn't think the MacRitchie's answer was accurate. We should have investigated further to determine the extent of these transfers.

Cataudella said that, although she disagreed with his approach she did not say anything because she didn't wish to be reprimanded, or fired, since she had recently moved her family from California to Oregon, and they relied on her income.

She testified that Bob Holmen, the new company counsel, took her concerns over the payments very seriously when he joined the firm in June 2015.

Cataudella said, 'I was relieved and vindicated to know that what Vanessa and I saw should not have been happening'. I felt that he would support me when I asked the business to make changes.

She also testified that Holmen agreed with her regarding an apparent misrepresentation Aequitas assets under management due double-counting. According to her testimony, and emails that Holmen sent to top executives, the amount was actually closer to $1 billion. Holmen told her that he was not happy when he shared the chain of emails with her.

Cataudella: "You're doing the right thing." Thank you. Thank you.

According to emails, MacRitchie shared Holmen's concerns regarding the use of funds as well as how it was presented to investors.

MacRitchie wrote: 'I agree with you that providing liquidity lines to affiliated companies is not the purpose of the fund.

MacRitchie said that the marketing materials which were to be evaluated by the compliance department contained numbers supplied by the finance department. Cataudella also testified.

She said, 'I was informed that they were from finance. I wasn't to dig deeper into them.'

Cataudella also remembered a meeting with Rice, Holmen and MacRitchie in early September 2015. Holmen claimed that the funds received by Aquitas Commercial Finance had been used to redeem investment in another fund. Rice appeared surprised by what Holmen said, but according to Cataudella's testimony, she wasn't.

Cataudella said Holmen "described the concept negative equity in the balance sheet, and together these may be considered a Ponzi Scheme." "I wasn't surprised. I was relieved that someone had said it, and glad to hear it.

Cataudella, in response to the language used by Aequitas in its private placement memorandum which provides a more detailed view of a fund than the one page 'tear sheet' given to clients, referred to an expression commonly used in compliance circles, 'You cannot disclose your way out fraud'

She testified that 'it all had to match'. "One cannot say one thing and then say that we are not doing it." You're still responsible.

Cataudella quit Aequitas in late September 2015.