Florida private equity manager Elliot Smerling has overseen a growing empire of more than $ 1.8 billion worth of private equity funds and led a lavish lifestyle, with homes in Florida, New York and Brazil as well as a collection of luxury cars including a Ferrari, a Corvette and a Cadillac Escalade.
But Smerling resorted to fraud to keep his complex financial operation afloat. according to a criminal complaint filed last week, falsely alleged that a private New York university invested in one of its funds in a $ 95 million loan application and forged a university official’s signature as part of the application.
He received the loan from Silicon Valley Bank in February but was arrested last week and charged with wire fraud and aggravated identity theft. He is charged with falsely claiming in his December 2020 loan application that the unnamed university in the lawsuit agreed to invest $ 45 million in one of his funds, and an unnamed New York investment bank pledged an additional $ 40 million Dollars in the same fund. He is also accused of filing a fake examination letter certifying the fund’s financial health and later sending a fake December 2019 bank statement showing a $ 4.5 million transfer from the university and a transfer from $ 4 million from the investment bank as part of their alleged investments.
Smerling was denied bail on Wednesday and faces up to 30 years in prison and a fine of up to $ 190 million if found guilty.
In arguing for Smerling being denied bail at Wednesday’s hearing, Assistant Attorney Adam McMichael described Smerling’s “extreme wealth” with several properties in Lake Worth, Florida and Wellington, Florida, as well as homes in New York and Brazil where Smerling’s wife comes from and where she still has dual citizenship. He added that the government did not have a full picture of Smerling’s assets as he refused to provide details on his finances.
The combination of Smerling’s wealth, potentially long prison terms and ties to Brazil, which does not extradite citizens, make him an escape risk, argued McMichael.
“With this extreme wealth, there are opportunities that most people don’t,” he said.
Smerling’s attorney, David Kibuliun, argued that Smerling was a pillar of the community, referring to his service on Head of the Entrepreneurship Program at the University of Miami Business School. He said Smerling was a devoted father and would not pose an escape risk.
The arguments could not influence the US judge William Matthewman.
“The alleged fraud here is $ 95 million which is a lot of money and there is a very heavy jail sentence that would be imposed on the victim if convicted, ”Matthewman said when denying Smerling’s bail request. He said he would be willing to reconsider if more information were presented to the court to better explain Smerling’s finances and what happened to the money approved by the loan.
Smerling, who was detained in Florida after his arrest last week, is being relocated to the South District of New York, who is leading the case.
Kibuliun and the University of Miami declined to comment.
The parent company of Silicon Valley Bank operating in their Annual report to the Securities Exchange Commission Monday that it was involved with law enforcement in an investigation into the bank’s potentially fraudulent loan to one of the Smerling funds, JES Global Capital III. The company said it could potentially lose $ 70 million as a result of the deal. The money was transferred from Silicon Valley Bank to the Japanese bank Sumitomo Mitsui Banking Corporation, which, according to statements at Smerling’s bond hearing on Wednesday, has a location in New York, to repay a loan that Smerling’s company had taken out from the Japanese bank. It is unclear whether the funds were actually used to repay the loan.
The money pledged to the Smerling Fund by the investors was used as collateral to get the loan from Silicon Valley Bank, which is a fairly common practice for private equity funds to give them access to funds they own for investments before they have raised funds from investors. A 2019 study by Economics professors at Carnegie Mellon University found that private equity funds are increasingly dependent on debt capital – partly driven by low interest rates – and that they used that money to inflate the returns they reported to their investors, potentially allowing them to charge higher fees.
Smerling provided the bank with a table of $ 500 million investor pledges, including allegedly fraudulent investments by New York University and the investment bank, according to the complaint. The deposit reported to the SEC in March 2020 that it had a gross net worth of $ 561,833,998.
Smerling is listed as a manager of four investment funds: JES Global Capital GP; JES Global Capital GP II; JES Global Capital GP III and JES Special Ventures Opportunity Fund. A screenshot of a Thank you message from the 2013 launch party for JES Global Capital indicated that JES Global Capital was a joint venture between Smerling, Miami real estate investor Jeff Schottenstein and New Jersey attorney Jeffrey Wasserman. Schottenstein and Wasserman did not answer multiple requests for comment.
McMichael, the federal prosecutor, said Wednesday it was difficult to determine Smerling’s real net worth because he appears to control a network of companies and has some offshore accounts. For example, companies associated with Smerling own several properties in Palm Beach County, including five adjacent properties in the Wellington area that were acquired for nearly $ 4 million between 2016 and 2020. Richard Annunziata, a Naples, Florida attorney listed on the company’s papers, did not return requests for comment.
Smerling had already filed for bankruptcy in 1993.