State retirement system claims suggest significant loss; feds sue, too
The Indiana Public Retirement System files suit against Jefferies Financial Group Inc., Leucadia Asset Management LLC, and associated entities and their principals seeking damages, rescission and equitable and other relief alleging multiple counts of violations of Indiana law including fraud, racketeering, breach of fiduciary, securities law violations, and the Crime Victim’s Relief Act.
We’ve learned that this action involves an investment by INPRS in a private investment fund that became the subject of federal criminal and civil enforcement matters this summer.
The action, Ind. Pub. Ret. Sys. v. Jefferies Fina Grp. Inc., No. 29D02-2510-CE-012191, was filed on Halloween in Hamilton County Superior Court 2 Commercial Court (Provisional).
We’d love to fill you in on the details, but more than half of the two-page complaint – the substance – has been redacted, with INPRS separately telling the court, that the “documents and agreements involved in those investments contained language requiring confidentiality of all information concerning the fund and its managers, including the Defendants. To avoid any potential assertion that Plaintiff has violated this asserted confidentiality,” INPRS says that it is filing its complaint excluding key information from public access, “with the expectation that an agreement can be reached with the Defendants to make the majority or all of the Complaint public in the near future.”
INPRS confirms to us that it invested in the 3|5|2 Capital ABS Master Fund LP (the “352 Fund”), an investment fund sponsored by Leucadia, a division and wholly owned subsidiary of Jefferies, “based on the defendants’ statements regarding their investment strategy and adherence to established controls, limits, and procedures.”
We’re unable to pinpoint when INPRS made the investment, learn on whose advice the deal was done, and discern just how much state employee pension money was directed toward this particular fund.
While we also can’t be certain about the details of the fraud allegedly perpetrated upon INPRS, we can tell you that one of the individual named defendants, Jordan L. Chirico, a former portfolio manager and investment advisor who worked under Leucadia Asset Management (formerly Jefferies Investment Advisors LLC), was indicted for fraud in mid-August in the U.S. District Court for the Southern District of New York.
The Carmel-based Chirico is charged with investment adviser fraud in connection with purchasing more than $100 million of Water Station Management, LLC bonds while concealing his personal $7 million financial stake in the company and, eventually, his knowledge of the fraud that had been perpetrated by the company’s principal.
“Together, the defendants’ conduct caused hundreds of millions of dollars in losses to Water Station investors and bondholders,” according to the U.S. Department of Justice, which claims that “Jordan Chirico made matters worse by putting his own financial interests before his professional duties, investing clients’ money in Water Station – helping himself and hurting his investors – even after he knew it was a scam. One fraud does not excuse another.”
Chirico is accused of operating a Ponzi-like scheme involving investments in Water Station bonds, concealing conflicts of interest, and prioritizing his own gains over those of his clients in the 3|5|2 Capital ABS Master Fund, directing the fund to invest heavily – to the tune of almost $100 million – in Water Station bonds despite the red flags . . . including being told that this was “the largest franchise fraud case in the history of the United States.”
Chirico, who faces parallel civil action from the SEC (along with Water Station’s Ryan Wear), lived in the Laurelwood subdivision in Carmel, home to former Gov. Mitch Daniels (R). Chirico sold his residence there to U.S. Rep. Victoria Spartz (R) and her husband for $1.85 million in late 2023 according to real estate websites.
The summons in the Hamilton County lawsuit filed by INPRS was sent to him at a different address just down the block in Laurelwood, a home associated with an LLC for which he is the registered agent, a residence that last sold for $3.4 million in 2020. He was personally served with a summons in this case at this address on Saturday morning.
While Jefferies and Leucadia were not charged with fraud, Jefferies has been winding down the 352 Fund (after marking down the value of the Fund’s holdings in Water Station by 50%; the 352 Fund has not collected any interest on its Water Station holdings since June 2024, nor has it recovered any of its principal investment) and has sued Chirico . . . who is defending against the civil suit by claiming, in part, that Leucadia authorized the investments and is merely trying to shift blame.
The other named individual defendants are Matthew B. Smith, Kaiwing Fung, and Jabez Dewey.
Smith has been Leucadia Asset Management’s COO since 2017. From 2010 through 2017, he served as chief administrative officer for Jefferies LLC and continues to be a member of the firm’s Risk Management Committee. Before taking on the CAO role, Smith was COO of Jefferies Global Equities Division.
Fung was the former head of credit for the Jefferies 352 Capital hedge fund, and Bloomberg reports that Fung is also alleged to have failed to adequately disclose that he owned Water Station Management franchises at the time of the 352 Fund’s investment in the company’s bonds.
Dewey is president and managing partner of Paragon Equity, with more than 18 years of experience in the industry, focused primarily on alternative investments within Fixed Income and Private Equity. Prior to launching Paragon Equity Partners, Dewey led the New York effort for Colorado-based Deer Park Road, focusing on capital formation from institutional allocators. In 2021, Mr. Dewey launched Paragon Equity Partners in partnership with Stonecrest Capital Markets.
An INPRS spokesperson tells us that “INPRS prosecutes legal actions where appropriate to protect our members’ assets and, as here, hold parties accountable for misconduct that harms our members’ financial interests.” “The driving factor here was the nature of the conduct involved, which is now the subject of federal criminal prosecution. As a fiduciary for our members, we take action to protect the fund from this type of fraud and abuse.” INPRS assures us to expect more information and evidence to be revealed in court as documents are unsealed and the litigation develops.
INPRS is being represented on the filings by Peter A. Schroeder and Nicholas G. Najjar of Norris Choplin Schroeder LLP in Indianapolis. We also expect that San Diego-based Robbins Geller Rudman & Dowd LLP, a longtime securities fraud counsel to the fund (and the top-ranked firm in the U.S. for this type of litigation according to ISS Securities Class Actions Services), will also sign on to the action. Robbins Geller was selected in 2018 as part of a Request for Proposals process, along with three other securities litigation firms.