(Bloomberg) — A Jefferies Financial Group hedge fund is seeking to recover millions in compensation from a former portfolio manager it claims invested more than $100 million in a fraudulent scheme.

Jefferies’ 352 Capital filed a revised lawsuit against Jordan Chirico in Manhattan federal court on Monday, expanding on his allegations that when he purchased bonds issued by WaterStation Management, he knew the Seattle-based water vending machine company was involved in a fraud.

Calling Chirico a “faithless servant,” 352 also added a demand that he recover any compensation paid to him from September 2022 until his dismissal in June 2024. The fund said he was paid a total of around 5, $3 million since first joining 352 in May 2020.

The fund, part of Jefferies’ Leucadia Asset Management division, first sued Chirico and others in July. Chirico moved to dismiss the original complaint earlier this month, arguing that 352 failed to prove he was aware of any wrongdoing at WaterStation and suggesting he was a victim himself.

Chirico did not immediately respond to a request for comment. You will have to file another motion if you want to challenge the revised complaint. Jefferies also did not respond to a request for comment.

federal investigation

According to the original and revised complaints, WaterStation issued bonds that it claimed would be used to finance the purchase and operation of thousands of filtered water vending machines. The company allegedly falsified purchase records for these machines, but in reality used the proceeds from the bond purchases primarily to pay or purchase “franchisees,” a group that 352 alleges includes Chirico.

WaterStation and Chirico are also at the center of a Justice Department investigation. In a related civil lawsuit filed in New York state court between Chirico and 352 for legal fees, Chirico’s attorneys revealed that he was “cooperating” with the Manhattan U.S. attorney’s office and had participated in voluntary interviews.

WaterStation, its founder Ryan Wear and several others were also sued for 352. A Washington state court judge placed WaterStation into receivership in May and removed Wear as manager in August. Last week, U.S. District Judge Valerie Caproni in Manhattan stayed 352’s lawsuit against WaterStation and two other entities, noting that they were part of federal bankruptcy proceedings in Texas.

Wear did not respond to a request for comment.

Chirico said in his motion to dismiss that each WaterStation bond investment was approved by Leucadia’s top brass and that his personal $7 million investment in a water machine franchise ended long before the alleged scheme began.

In its revised lawsuit, 352 rejected many of Chirico’s arguments, emphasizing that it acted “unilaterally” in making its investments. The fund also claimed for the first time that Chirico’s ties to former WaterStation CFO Tyler Sadek, whom it described as a “close personal friend” of the former portfolio manager, were a factor in his investment in the company’s bonds. company.

A lawyer for Sadek did not respond to a request for comment.

‘Commercial bribes’

New allegations were also made about Chirico’s relationship with REVL Securities, the boutique investment bank that acted as collateral manager for WaterStation’s bonds. In its original complaint, 352 alleged that REVL discovered that thousands of WaterStation machines did not exist and that the company had been fraudulently reporting revenue generated by other vending machines, but failed to report its findings to the bond administrator.

On Monday, 352 accused REVL of choosing to help cover up the fraud because of its “long personal and professional relationship” with Chirico. According to the fund, Chirico had known REVL principals for at least a decade, when he joined 352, and the firm advised him on his personal investment in WaterStation. The fund said REVL responded to the fraud by giving WaterStation 90 days to rectify the situation, but then took no action after the deadline expired.

A lawyer for REVL declined to comment.

The fund claims that Chirico’s investment in WaterStation was a conflict of interest that violated his employment contract. Chirico denied this in his motion to dismiss, saying he disclosed to Leucadia his ownership of C3, the company that owned that investment. According to 352’s revised complaint, Chirico claimed in his disclosure that C3 was outside of his “coverage industry sector,” even though he later invested the fund’s money in WaterStation.

According to the revised lawsuit, Chirico also accepted a series of “business bribes” from Wear to keep him in the alleged scheme. These allegedly included a $1.9 million promissory note with a 15% interest rate issued to C3 in September 2023 and a $3.6 million wire transfer intended to repay a Small Business Administration loan from that Chirico had obtained to make his personal investment in WaterStation.

Chirico joined restaurant chain FAT Brands Inc. as head of capital markets in July, but left weeks later to focus on defending against 352’s lawsuit, Bloomberg reported at the time. Meanwhile, Jefferies began reducing his trading positions in the hedge fund.

The case is 352 Capital v. Wear, 24-cv-05102, United States District Court, Southern District of New York (Manhattan).

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