PE Fund Merida Sues Lender for $3.2M Repurchase Deal

Merida Capital Partners III LP has filed a lawsuit alleging securities lending fraud related to a $3.2 million repurchase agreement. The private equity fund claims Jacob Fernane, founder of Pacific Lion LLC, orchestrated a sham deal that allowed him to pocket over $1.6 million.

Key Details:

• Allegations: Fernane allegedly used false pretenses to obtain $3.2 million in cash and stock, then failed to honor the repurchase agreement while providing "increasingly improbable excuses" for delays.

• Legal Action: The complaint was filed on February 12, 2025, in the US District Court for the Southern District of New York.

• Response: Merida pursued repayment for months before litigation, with Fernane reportedly disappearing for weeks at a time during negotiations.

The case highlights growing scrutiny of alternative investment arrangements in private equity markets. Bloomberg Law first reported the story through court filings.

Securities and Repurchase Agreements Framework

Specific Securities Involved

• The securities at the center of the lawsuit are 415,000 shares of Green Thumb Industries Inc. ("GTI").

Structure of the Repurchase Agreement (BORRO)

The lawsuit Merida Capital Partners III LP v. Jacob Fernane, Pacific Lion LLC, Liqueous LP describes a transaction, BORRO, which Merida alleges to be a fraudulent scheme.

According to the complaint, the technical aspects of the transaction structure are as follows:

• Stock Repurchase Agreement (BORRO): The core of the alleged scheme was a "Beneficial Ownership Retention Repurchase Option" (BORRO), a stock repurchase agreement, executed between Merida and Pacific Lion. Merida claims this agreement was a sham designed to enable Fernane to steal securities.

• Initial Transfer of Shares: Merida transferred 415,000 shares of Green Thumb Industries Inc. (GTI) to Pacific Lion. The stated purchase price was $1,612,275, a 50% discount on the market value.

• Control and Authority: Pacific Lion gained full control over the custodial account holding the shares, with broad authority to execute transactions. This included buying, selling, or hedging the shares, supposedly through borrowing or hypothecation in a separate account established by Pacific Lion.

• Premium Payments: Merida was required to make four premium payments of $13,099 each, totaling $52,398, to maintain its "beneficial ownership" of the shares.

• Repurchase Option: Merida had the option to repurchase the shares at the original price of $1,612,275 upon the BORRO's expiration around July 14, 2024.

• Alleged Conversion and Misuse: Contrary to the agreement, Fernane allegedly converted and sold Merida’s securities almost immediately. When Merida attempted to repurchase the shares, Fernane allegedly took $1.625 million without returning the securities.

• False Representations: The structure was allegedly based on misrepresentations. These included false statements about Merida's ability to repurchase the shares, how the shares would be managed, and the timing of their return.

• Alter Ego: Fernane used Pacific Lion to enter the BORRO but then transferred the shares to an account in the name of Liqueous. Merida alleges that Pacific Lion and Liqueous are interchangeable alter egos of Fernane.

Protection Strategies for Lenders: Key Lessons for Alternative Lenders

1. Custody Arrangements: Always insist on proper third-party custody arrangements with reputable institutions. The assets should never be solely under the counterparty's control.

2. Entity Verification: Conduct thorough due diligence on all entities involved, including any affiliated entities that might handle the assets.

3. Transaction Monitoring: Implement real-time monitoring of any permitted transactions involving the collateral.

4. Documentation Requirements: Ensure all agreements clearly specify:

   • Custody arrangements

   • Transfer restrictions

   • Verification requirements

   • Default triggers

   • Remedy procedures

5. Red Flag Monitoring: Watch for warning signs like:

   • Unusually deep discounts

   • Multiple entity structures

   • Resistance to standard custody arrangements

   • Delays in routine transactions

   • Frequent changes in counterparties or accounts

This case serves as a valuable reminder that even sophisticated institutional investors can fall victim to fraud when proper controls aren't in place. It's particularly relevant for lenders dealing with securities-based lending or similar structured products.

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