Investors accuse investment firm of hiding debt in $1.75M fraud case

Two investors claim a private equity firm defrauded them of $1.75 million by secretly tying their money to debt they were promised wouldn't exist. 

Prashanth Reddy Dynasty Trust and Aaksa Jai LLC filed suit November 18 in federal court in Illinois against Thomas J. McDonough and his firms TJM Capital Partners, TJM-HSH and Hayes Services Holdings, alleging securities fraud and misrepresentation. 

The case centers on what the investors say was a bait-and-switch scheme involving Hayes Services, a boiler servicing business they were told would operate as an independent, debt-free company generating steady cash distributions. 

According to court filings, that's not what happened. 

The investments were made in December 2021 after McDonough and TJM pitched Hayes Services as one of two separate entities being carved out of Hayes Mechanical, a full-service mechanical contractor specializing in commercial and industrial work. Hayes Services would handle utilities and boiler servicing as a wind-down play, while Hayes Commercial would pursue growth as a traditional private equity investment. 

The investors say they made clear they weren't interested in investing in or growing a boiler business but were interested in the economics and risk presented by a wind-down investment. They claim they were told Hayes Services would be acquired with all-equity financing, carry no senior term loan, no bank debt and no seller debt, and would make cash distributions to investors. 

The Trust invested $750,000 on or around December 12, 2021, for 750,000 Class A Common Units at $1 each. Aaksa put in $1 million on or around December 15, 2021, for 1 million Class A Common Units, also at $1 per unit. 

Hayes Services outperformed TJM's revenue and EBITDA projections for the first several quarters and since then has performed at projected levels, the investors say. Yet they received no distributions until 2024, and those were minimal, tax-related payments. They claim they have received no non-tax related distributions from their Hayes Services investment. 

When they asked why, given that Hayes Services appeared to be performing as or better than projected, the investors say McDonough and TJM revealed something they hadn't disclosed before: Hayes Services had been cross-collateralized with Hayes Commercial to obtain a loan to fund Hayes Commercial's operations. That meant Hayes Services was prevented from making distributions because its cash collateral was tied up with the debt service and working capital needs of Hayes Commercial. 

The investors claim they didn't learn about the cross-collateralization until approximately a year after investing, when a TJM executive told them McDonough had cross-collateralized the Hayes businesses before they put their money in. The executive said he himself only became aware of this arrangement after the fact, according to the filing. 

The alleged scheme didn't stop there. The investors claim McDonough and TJM raised funds from investors through hard money loans to transfer Hayes Mechanical's valuable real estate to another entity owned and controlled by McDonough at reduced prices. Once he owned the properties, McDonough allegedly rewrote the leases, hiked the rents and generated over $17 million in profit that should have gone to Hayes Services or Hayes Commercial investors. 

The investors say that upon information and belief, McDonough has engaged in similar real estate carveout schemes in the past with other TJM investments, suggesting what they describe as a pattern of deliberate and intentional misrepresentations to extract shareholder value from investors. 

The allegations are particularly notable given that the investors had backed other McDonough opportunities before, creating what they describe as a general sense of trust that made them inclined to rely on McDonough and TJM's representations. 

On January 29, 2025, the investors met with McDonough and other TJM representatives. During that meeting, they say McDonough admitted Hayes Services was presented as a standalone wind-down investment paying cash distributions but blamed working capital constraints and the economy for the lack of distributions. He promised Hayes Services investors would soon receive a large distribution. That didn't happen. 

At a March 5, 2025, meeting, McDonough and TJM representatives cited "tax issues" from the previous year as the reason distributions remained unpaid. Still no money came. 

The investors are seeking at least $1.75 million in damages, rescission of their subscription agreements and additional compensation. They argue that given Hayes Services' actual performance, had the defendants not secretly cross-collateralized the business and instead made distributions proportionate to their projections, their investments would now be worth over $3.5 million and would be far more liquid and not subject to the increased risk profile Hayes Services now faces. 

The lawsuit raises claims under the Securities Exchange Act of 1934 and Illinois Securities Law of 1953, along with state law claims for fraud, fraudulent inducement, fraudulent misrepresentation and negligent misrepresentation. 

The case is Prashanth Reddy Dynasty Trust and Aaksa Jai LLC v. Thomas J. McDonough, TJM-HSH LLC, TJM Capital Partners LLC and Hayes Services Holdings LLC, Case No. 1:25-cv-14128, filed in U.S. District Court for the Northern District of Illinois. 

The defendants have not yet responded to the allegations.