This article was featured on the miamiherald.com BY BEN WIEDER
Florida private equity manager Elliot Smerling has overseen a growing empire of private equity funds reportedly worth more than $1.8 billion and lived 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 claiming in a $95 million loan application that a private New York university had invested in one of his funds and forging a university official’s signature as part of the application.
He obtained the loan from Silicon Valley Bank in February but was arrested last week and charged with wire fraud and aggravated identity theft. He is accused of falsely claiming in the December 2020 loan application that the university, which is unnamed in the complaint, had agreed to invest $45 million in one of his funds and an unnamed New York investment bank had committed to investing another $40 million in the same fund. He is also accused of submitting a forged audit letter attesting to the financial health of the fund and later sending a falsified bank statement from December 2019 showing a $4.5 million wire transfer from the university and a $4 million wire transfer from the investment bank as part of their purported investments.
Smerling was denied bail Wednesday and faces up to 30 years in prison and a fine up to $190 million if he is found guilty.
In arguing for Smerling to be denied bail at the Wednesday hearing, Assistant U.S. Attorney Adam McMichael described Smerling’s “extreme wealth” with multiple properties in Lake Worth, Florida, and Wellington, Florida, as well as homes in New York and Brazil, where Smerling’s wife is from and where she still holds dual citizenship. He added that the government doesn’t have the full picture of Smerling’s wealth because he declined to provide details about his finances.
The combination of Smerling’s wealth, potentially long sentence and connections to Brazil, which doesn’t extradite citizens, make him a risk for flight, McMichael argued.
“With that extreme wealth comes opportunities that most individuals don’t have,” he said.
Smerling’s lawyer, David Kibuliun, argued that Smerling is a pillar of the community, citing his service on the board of the entrepreneurship program at the University of Miami’s business school. He said Smerling is a devoted father and wouldn’t pose a flight risk.
The arguments didn’t sway U.S. Magistrate Judge William Matthewman.
“The alleged fraud here involves $95 million which is an awful lot of money and there’s a very heavy prison sentence that would be imposed on the victim if he is convicted,” Matthewman said in denying Smerling’s request for bail. He said he would be willing to reconsider if more information was introduced to the court to better explain Smerling’s finances and what happened with the money approved by the loan.
Smerling who was being held in Florida after his arrest last week will be transferred to the Southern District of New York, which is presiding over the case.
Kibuliun and the University of Miami declined to comment.
The parent company for Silicon Valley Bank indicated in its annual report to the Securities Exchange Commission Monday that it was participating with law enforcement in investigating the bank’s potentially fraudulent loan to one of Smerling’s funds, JES Global Capital III. The company said it potentially stood to lose $70 million from the deal. The money was wired from Silicon Valley Bank to the Japanese bank Sumitomo Mitsui Banking Corporation, which has a location in New York, according to testimony at Smerling’s bail hearing Wednesday, to repay a loan Smerling’s company had taken out from the Japanese bank. It isn’t clear whether the funds were, in fact, used to repay the loan.
Money pledged by investors to Smerling’s fund was used as collateral to obtain the loan from Silicon Valley Bank, which is a fairly common practice among private equity funds to give them access to money needed to make investments before they have collected funds from investors. A 2019 study by business professors at Carnegie Mellon University found that private equity funds were increasingly relying on debt — driven in part by low interest rates — and that they used this cash to inflate the returns they reported to their investors, potentially allowing them to collect greater fees in the process.
Smerling provided the bank with a table listing $500 million in pledges from investors as of December 2019, according to the complaint, including the allegedly fraudulent investments from the New York university and investment bank. The fund reported to the SEC in March 2020 that it had $561,833,998 in gross assets.
Smerling is listed as the 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 lawyer Jeffrey Wasserman. Schottenstein and Wasserman did not return multiple requests for comment.
McMichael, the federal prosecutor, said Wednesday that it was difficult to determine Smerling’s actual wealth because he appeared to control a network of companies and had some offshore accounts. As one example, companies tied to Smerling own several properties in Palm Beach county, including five adjoining lots in the Wellington area obtained between 2016 and 2020 for nearly $4 million. A Naples, Florida, lawyer listed on paperwork for the company, Richard Annunziata, did not return requests for comment.
Smerling previously filed for bankruptcy in 1993.