Jailed fund manager claimed glittering array of investors. Bank says it was “brazen fraud”
Florida private equity manager Elliot Smerling lied about his investors and his biography to secure a $150 million line of credit, according to a lawsuit filed this week by Silicon Valley Bank, which approved the loan in February and is now trying to get its money back.
The supposed investors in Smerling’s fund included billionaire hedge fund manager and New York Mets owner Steven A. Cohen; the investment company of deceased Blockbuster founder and former Miami Dolphins owner Wayne Huizenga, the endowments for the University of Miami and New York University; a financial firm co-founded by NFL Hall of Fame quarterback Steve Young, as well as several financial institutions, including The Bank of New York Mellon and BBVA bank and SunTrust Bank.
Smerling also told the bank that he had previously been the chief investment officer at the firm co-owned by former 49ers great Young.
All lies, according to the bank and to the companies mentioned, part of what the bank called Smerling’s “brazen fraud.”
The lawsuit comes nearly one month after Smerling, who oversees funds reportedly holding $1.8 billion in assets, was arrested by the FBI and charged with fraud for allegedly forging documents to obtain the loan from Silicon Valley Bank.
Assistant U.S. Attorney Adam McMichael said in a hearing March 3 that Smerling lived a life of luxury, with multiple homes in Florida, New York and Brazil, and a fleet of luxury cars that included a Ferrari, a Cadillac Escalade and a Corvette. His access to wealth, coupled with the possibility of a prison sentence of up to 30 years and a fine of up to $190 million, made Smerling a risk to flee the country to avoid the charges, McMichael said at the hearing.
“With that extreme wealth comes opportunities that most individuals don’t have,” he said.
U.S. Magistrate Judge William Matthewman agreed, denying Smerling release on bail. He is currently in custody in the Miami federal detention center awaiting transfer to New York.
The lawsuit seeks to recover nearly $80 million that Smerling still owes the bank, along with interest and the bank’s fees for bringing the suit.
It isn’t clear why Smerling listed these particular investors in the documentation for the loan. The fund indicated in a filing with the U.S. Securities and Exchange Commission last year that it held $561,833,998 in assets.
Smerling, who earned an MBA from the University of Miami, has served on the advisory board of the business school’s entrepreneurship program, but the university said Friday morning that Smerling has been removed from the board. It did not say whether the university invested with any of his funds. In a table of purported investors, Smerling’s fund indicated that the university’s endowment had pledged to invest $25 million in the fund.
The fund indicated that HGGC, the investment fund co-founded by former 49ers great Young, had pledged to invest $50 million in Smerling’s fund and a presentation by the fund that it provided to the bank indicated that Smerling had previously been the firm’s chief investment officer, neither of which is true, a representative for the firm said.
Representatives for other alleged investors denied having bought into the fund or having any connection to Smerling.
“We have nothing to do with it,” said Chris Brandon, the chief financial officer for Huizenga Holdings. “It’s unfortunate that someone tried to trade off our name.” The table indicated that Huizenga Holdings had committed to investing a total of $35 million, $10 million of which was supposedly connected to Steven Berrard, the former CEO of AutoNation and Blockbuster, both of which had been owned by Huizenga.
Berrard, too, said he had no connection to Smerling.
“Until a few days ago, I’d never heard of this gentleman. Never invested in any of his funds, didn’t know anything about him,” he said.
NYU also said that it had no affiliation with Smerling.
“NYU neither has nor had any involvement with the defendant, and NYU has never invested any money with him,” said NYU spokesman John Beckman. “We do not know why he involved NYU in his scheme, and we were unaware of it until we were contacted by law enforcement, with whom we readily cooperated. We are saddened and troubled to learn of our institution’s name being used this way.”
A spokesperson for the Mets owner Cohen said that neither he nor any related entities had invested with any of Smerling’s funds and a representatives for The Bank of New York Mellon also said it hadn’t invested with JES Global Capital GP III or any of Smerling’s other funds.
A spokesperson for BBVA declined to comment, saying the bank doesn’t discuss pending litigation.
A lawyer representing Smerling declined to comment.
Smerling’s arrest in February has led to calls for greater due diligence by banks and financial institutions that provide so-called “subscription credit” to private equity firms that use the promise of future investments by investors, which are called subscription agreements, as collateral for loans. The loans allow private equity firms to make investments before they have asked investors to pony up cash and they have grown in popularity in recent years, according to a 2019 study by business professors at Carnegie Mellon University — driven partially by low interest rates.
The researchers found that private equity funds used the cash they obtained from loans to manipulate and inflate the returns they reported to their investors, potentially allowing them to collect greater fees in the process.
The lawsuit filed by the bank accuses Smerling of providing a falsified audit from the firm BDO USA, LLP that the firm said it never issued and contained a falsified signature along with other financial documents that the bank alleges were false.
The documents included a letter to Hong Kong billionaire Michael Kadoorie requesting that his company, CLP Holdings, send the fund the money it had pledged.
[Update: After publication, a representative for CLP Holdings provided the following statement: “It has come to our attention that certain parties are alleged to have made false representations that CLP was an investor in investment fund JES Global Capital III. We can confirm that neither CLP Holdings nor Sir Michael Kadoorie has any association with the investment fund and any of Mr Elliot Smerling’s other funds.”]
The bank approved Smerling’s fund for a $150 million line of credit in early February and immediately wired nearly $95 million to an account in the fund’s name at the Japanese bank Sumitomo Mitsui Bank Corporation, which Smerling had told the bank would close out a prior line of credit the fund held with the Japanese bank.
After the loan had been approved, the bank asked Smerling’s fund to provide additional information as part of its post-closing due diligence, such as the name of the auditor who performed the audit and corporate documents for the fund’s investments. The fund refused to provide the documents and Smerling angrily wrote to the bank that he was “flummoxed” by the request and “extremely concerned regarding the manner in which we are being treated.” One week later, Smerling was arrested by the FBI.
This story was originally published March 26, 2021 at 9:46 AM.
