AEquitas Capital Management lawsuit was filed against Equitas when their former senior vice president, Matthew Ledger, died in his home from a heroin overdose. According to the lawsuit, Ledger was well aware of the risks associated with his drug use. During the time that he was president of Equitas, he made many changes to the company’s risk control policies without telling anyone at the company. One of those changes affected Aequitas’ capital funding policy and the way the company treated its insured depositors. An insurance deposit is money that an investor gives to an insurer in exchange for the right to receive dividends.
The Aequitas lawsuit claims that this policy was changed in order to artificially lower the risk of Aequitas’ insured depositors requesting a reissue of their capital notes. According to the lawsuit, Ledger altered the capital policy to limit the amount of dividends that equities could produce on their investments. This would artificially lower the amount of cash an investor would receive from their equity account if they had to request a reissue of their notes. This would also artificially lower the amount of interest that the insurer could pay on its insurance notes. The purpose of this artificially lowering of the rate is to keep insurance premiums from increasing.
It’s important to understand that there is a significant difference between altering your capital structure and manipulating risk in order to lower it. Creating artificial limitations on how much money your firm can make when you lose money on one investment does not constitute manipulation. However, using accounting tricks like this in order to decrease the amount of taxes that you must pay on income or capital gains derived from property or casualty sales, or interest on loans and advances does. Those are considered manipulation because such actions do not benefit the investor but instead harm the investor’s pocketbook.
The current Aequitas Capital Management lawsuit was brought on by the heirs of Matthew Ledger. Ledger was the co-founder of Aequitas, which was then a small New York based company that dealt primarily in commercial paper. Ledger left the company in 2005 in a highly controversial and public way. He committed suicide in an attempt to hide information about the company he was working with from the Internal Revenue Service.
While no one can say for sure what caused Ledger to take his own life, speculation abounds that it may have something to do with money owed to the company by investors. If so, that would be a classic case of greed running amok. At the time of his death, Aequitas Capital had $2.5 million in unpaid notes. They had previously been instructed by their insurance company not to pay any more money to Ledger unless the suit was resolved. That loophole allowed Aequitas to collect on the outstanding note at an artificially high rate.
The estate of Ledger was liquidated and the company and its assets were sold. As is typical when dealing with a liquidation process, most of the stock was sold at a very low price, allowing the company to return a portion of its profits to shareholders. However, a large number of stockholders did not want to see their investment get punished and a lawsuit was filed against Aequitas. In August, 2009 the case was settled out of court. The terms of the settlement weren’t disclosed.