Claim against First Fed alleges $100M fraud

PORT ANGELES — Business loans First Fed Bank made to an Everett-based company that was selling water vending machine franchises starting in 2020 were the start of a relationship that could end up in King County Superior Court next year.

A complaint lodged June 10 by the hedge fund 352 Capital GP alleges First Fed conspired with WaterStation Management owner Ryan Wear and a network of affiliated businesses he controlled to defraud its investors of more than $100 million.

First Fed is accused of conspiracy to commit fraud, aiding and abetting fraud and unjust enrichment. 352 Capital is seeking $106.925 million in damages, attorneys' fees and court costs.

In a June 13 U.S. Securities and Exchange Corporation filing, First Fed strongly disputed the accusations and said it would "vigorously defend against the claims."

In a statement through Fearey, its public relations firm, First Fed said, "Our strategic direction remains unchanged. Working closely with the Board, as Interim CEO, Geri [Geraldine Bullard] will continue to help drive innovation and long-term growth while ensuring continued financial stability and regulatory compliance."

"The Bank historically provided loans and banking services," it continued.

This isn't the first lawsuit related to WaterStation Management in which First Fed has been entangled. A similar lawsuit last year was dismissed without prejudice.

The departures of First Fed Chief Banking Officer Christopher Neros on July 2 and President and CEO Matt Deines on July 12 came on the heels of the 352 Group filing and a year after the bank was hit with a lawsuit filed in Snohomish County by a group of WaterStation franchisees.

Established in 2016, WaterStation Management sold investors franchise ownership of self-service water bottle-filling stations that were to be installed in grocery, convenience and retail stores. According to the 352 Group lawsuit, most of those machines were not only never installed, they never existed. The lawsuit claims Wear diverted the money to pay off early investors, his own businesses and creditors like First Fed.

The bank made a total of $36 million in loans to WaterStation and Ideal Property, another business owned by Wear, and created a financing program that made loans to WaterStation franchisees that were backed by the U.S. Government's Small Business Administration, according to the lawsuit.

In addition, 352 Group has accused First Fed of facilitating the transfer of more than $12.9 million in bond proceeds to WaterStation that were supposed to be used acquire water vending machines. Instead, it paid itself and franchisees who had missed payments on their SBA loans.

In May, the state Department of Financial Institutions charged Wear, WaterStation, its business affiliates and some of its sales staff with violating the state's securities act by selling unregulated securities in the form of the vending machines and contracts.

According to the statement of charges, franchisees were told they could realize returns of 12 percent to 20 percent with very little effort — a lure the DFI said was used to attract investors.

The DFI said at least 171 investors across the country paid WaterStation $129 million; at least 10 Washington residents invested about $11.2 million.

First Fed is not named in the statement of charges from the DFI. Details of the investigation will not be released until it is finalized and the DFI has filed a final order or entered a consent order, a representative of the regulatory agency said.

Last August, creditors filed an involuntary Chapter 11 bankruptcy petition against WaterStation. That case is now pending in the U.S. Bankruptcy Court in the Eastern District of Washington.

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Reporter Paula Hunt can be reached by email at [email protected].