Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
United Capital Source CEO Jared Weitz Discusses The State of Small Business Finance
September 24, 2020Jared Weitz, the CEO of United Capital Source, recently sat down (virtually) for an interview with me to discuss the state of small business finance. During it, Weitz makes an alarming prediction, that pandemic related events will lead to 50% of all restaurants permanently closing. You can watch our full talk below:
NYC Taxi Drivers Protest, deBanked Reporter Goes For a Ride
September 17, 2020
On Thursday, NYC taxi drivers shut down the Brooklyn Bridge to formally protest the financing costs tied to their taxi medallions, the certificate that allows them to operate in the five boroughs. Tensions over “Medallion loans” have been bubbling over since last year when it was revealed that many borrowers had signed a Confession of Judgment to obtain their loan, which basically waived their right to settle any disputes with their lender in court should they be unable to make the payments. Since then, COVID has completely devastated an already suffering industry…
“Before it was good, we could make $100-$150 a day,” said Mohammad Ashref, a local Brooklyn taxi driver in a video interview with deBanked reporter Johny Fernandez. “Now it’s very hard to survive, we work very hard to make 60, 70, or $80 a day, but what can I do? I have to make a living. We have no other choice.”
Ashref technically drives a green cab, different from the yellow cabs that were protesting on the bridge in that they’re not permitted to accept street-hails throughout most of Manhattan. Green taxis also operate through a permit rather than a medallion, a still relatively new concept that was first rolled out in 2013 to facilitate ride-hailing in the outer boroughs where yellow cabs did not spend much time.
In the interview with Fernandez, Ashref pointed out that the success of the taxi business is intertwined with the restaurant industry. Many riders in the boroughs depend on cabs to take them to restaurants or night clubs, but with the complete ban on indoor dining still in effect within city limits, that need has mostly dried up.
According to the NYC Taxi & Limousine Commission, yellow and green cabs were making as little as $314 and $210 a week respectively during the peak period of the shutdowns. In a 40 hour week, these amount to a fraction of the $15/hour local minimum wage and that’s even before factoring in driver costs like a vehicle lease, loan payments, insurance, and more.
deBanked has been exploring several areas of the New York City economy over the last few months. For instance in July, reporter Johny Fernandez looked into how the pandemic was affecting a street performer in Times Square that was dressed as Batman.
“The business now is slow,” Batman said. “There’s so few people at this moment […] At this moment I see people scared, they don’t want pictures…”
Batman, like others in New York City, was hopeful that a return to normalcy was just around the corner.
Peter Ribeiro, CEO of US Business Funding – Talks About Experience and Success in 2020
September 17, 2020I recently caught up with Peter Ribeiro, CEO of US Business Funding, based in Santa Ana, California. US Business Funding is quite well known on social media for their company culture.
I asked Ribeiro about what 2020 has been like as a broker in this wild year of 2020 and you can watch it in full below:
Fountainhead CEO Chris Hurn Speaks With deBanked About His Experience With 2020
September 9, 2020Chris Hurn, the CEO of Fountainhead, a national non-bank direct commercial lender based in Lake Mary-FL, recently told deBanked in an interview what his company has experienced in 2020. The company was recently ranked 1,502 on the Inc. 5000 list.
Watch the interview below:
OnDeck Directors Sued in Class Action For Allegedly Withholding “Material Information” From Shareholders To Make Enova Deal Happen
September 8, 2020
An OnDeck shareholder is asking the Delaware Court of Chancery to halt the sale of the company to Enova until OnDeck discloses allegedly material information that would appear to put the landmark deal in an entirely new light.
On September 4, Conrad Doaty filed a class action lawsuit against Noah Breslow, Daniel S. Henson, Chandra Dhandapani, Bruce P. Nolop, Manolo Sánchez, Jane J. Thompson, Ronald F. Verni, and Neil E. Wolfson for breaching their fiduciary duties owed to the public shareholders of OnDeck.
According to Doaty, the Enova offer of $90 million ($82 million stock, $8 million in cash) was not even the best bid that OnDeck received but he alleges that OnDeck’s directors and executives took it because they were individually offered “exorbitant personal compensation” including “millions of dollars in severance packages, accelerated stock options, performance awards, golden parachutes and other deal devices to sweeten the offer.”
Doaty makes reference to other bids for OnDeck with specifics including two all-cash offers, one that valued OnDeck at between $100 million and $125 million and one that valued it at between $80 million and $110 million. He says that no explanation for their rejection was disclosed.
Doaty also alleges that OnDeck relied on two sets of financial projections to evaluate a sale of the company, one for all prospective bidders (that projected a quick economic recovery) and another set that was used only for Enova (that projected a slow economic recovery). Doaty’s point is that Enova’s valuation was based on less optimistic data and that OnDeck did not publicly disclose to shareholders the more optimistic version that all the other prospective buyers of the company got to see.
“Most significantly, is that it is not pressing time to sell,” Doaty says. “The company was not facing imminent financial collapse or financial ruin.” He continues by pointing out that the company had $150 million of cash on hand and that it had successfully navigated workouts with its creditors over issues caused by the pandemic.
“Yet as a result of the frantic and unreasonable timing of the sale, the consideration offered for OnDeck is woefully inadequate.”
In addition to “exorbitant personal compensation” promised to the Board members, Doaty argues that a cheap price benefits parties who sat on both sides of the transaction, namely Dimensional Fund Advisors LP, BlackRock, Inc., and Renaissance Technologies, LLC, all of whom are said to hold greater than 5% beneficial ownership interest in both OnDeck and Enova. None of them are named as defendants.
“…even if the exchange ratio is unfair,” Doaty argues, “those institutional investors will still benefit from seeing their positions in Enova benefitted. Non-insider stockholders, on the other hand, will not be parties to the benefit.”
The law firm representing the plaintiff in Delaware is Cooch and Taylor, P.A.
Case ID #: 2020-0763 in the Delaware Court of Chancery.
You can download the full complaint here.
As an aside, deBanked mused two days prior to the filing of this lawsuit that the sales price of OnDeck was so low that early OnDeck shareholders stand to recover less of their investment as a result of this deal than investors in a rival company that was placed in a court-ordered receivership by the SEC.
What is ‘Lending as a Service?’
September 3, 2020I‘ve heard of SaaS, but now there’s LaaS, Lending as a Service. I recently spoke with Timothy Li, CEO of Alchemy, a fintech infrastructure company that offers that and more. You can check it out below!
Section 1071 is Back and The CFPB Wants to Know How Much It Will Cost You to Comply
August 25, 2020
At some point in this century, small business finance companies will be expected to comply with Section 1071 of the Wall Street Reform and Consumer Protection Act that was passed in 2010.
In the wake of the ’08-’09 financial crisis (remember that?!), lawmakers passed the above act that has become colloquially known as Dodd-Frank. Section 1071 gave the Consumer Financial Protection Bureau the authority and the mandate to collect data from small business lenders (and similar companies).
The costs, risks, and challenges with rolling out this law have been discussed on deBanked for 5 years, yet little progress has been made to finally implement it. But it’s starting to move along and the CFPB would now like to know how expensive it will be for businesses to comply.
If you are engaged in small business finance, you should seriously consider submitting a response to their survey. The CFPB is specifically cataloging responses from merchant cash advance companies, fintech lenders, and equipment financiers.
How An Online Lending Hedge Fund Manager Became “Unwound”
August 12, 2020
In 2017, Ethan Senturia, the founder of a defunct online lending company, published a tell-all book about his startup’s rise and fall. He called it Unwound. It’s the fall that stood out. Senturia’s poorly modeled business had been heavily financed by an up-and-coming online lending hedge fund manager named Brendan Ross.
I first encountered Ross in 2014 on the alternative finance conference circuit. Ross’s major theory was that small businesses overpay for credit and that the padded cost served as a hedge against defaults and economic downturns.
“The asset class works even when the collection process doesn’t,” Ross said during a Short Term Business Lending panel at a conference in May 2014. “The model works with no legal recovery.”
As an editor, I helped secure a lengthy interview with Ross that Fall. In it, he placed a special emphasis on building “trust.” It’s a word he used seventeen times over the course of the recorded conversation. “Everything is about trust and eliminating the need for it whenever possible,” he proclaimed.
Ross stressed that his fund invested in the underlying loans of online lenders, not in the online lenders themselves. “I need to be the owner of the loan. I need it sold to me in a way that is completely clean.”
Ross would eventually connect with Senturia at Dealstruck, an online small business lender whose philosophy seemed to contradict Ross’s mantra of small businesses overpaying for credit. Dealstruck, it would turn out, had a tendency to have them underpay…
Senturia told the New York Times that year that Dealstruck’s mission was “not about disintermediating the banks but the very high-yield lenders.”
It’s a concept that failed pretty miserably. Senturia recalled in his book that “We had taken to the time-honored Silicon Valley tradition of not making money. Fintech lenders had made a bad habit of covering out-of-pocket costs, waiving fees, and reducing prices to uphold the perception that borrowers loved owing money to us, but hated owing money to our predecessors.”
As the loans underperformed, Senturia became aware that the hedge fund backing them, Ross’s Direct Lending Investments, might also be doomed. Senturia recalled an exchange with Ross in 2016 in which Ross allegedly said of their mutually assured destruction, “I am like, literally staring over the edge. My life is over.”
One would expect that in light of that conversation being made public through a book, that investors would question Ross’s report that his fund delivered a double digit annual return (10.61%) the same year his life was over.
Some actually did question it. deBanked received tidbits of information in the ensuing years, always seemingly off the record, that something was not right at Ross’s fund. There was little to go off other than the unlikelihood of his consistently stable stellar returns. Ross had been an especially popular investment manager with the peer-to-peer lending crowd and a regular face and speaker at fintech events. CNBC also had him on their network several times as a featured expert.
All told, Ross managed to amass nearly $1 billion worth of capital under management before his demise.
In 2019, Ross suddenly resigned. His fund, Direct Lending Investments, LLC, was then charged by the SEC with running a “multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.”
Yesterday, the FBI arrested Ross at his residence outside Los Angeles. A grand jury indicted him “with 10 counts of wire fraud based on a scheme he executed between late 2013 and early 2019 to defraud investors…” An announcement made by the US Attorney’s Office in Central California revealed that the charges had been under seal for approximately two weeks prior.
The SEC simultaneously filed civil charges against him.
No reference is made to Dealstruck in any of it. The Dealstruck brand was later sold to another company that has no connection to Ross or Senturia where it is still in use to this day. Instead, the SEC and US Attorney focus on Ross’s actions allegedly undertaken with another online lender named Quarterspot. Quartersport stopped originating loans in January of this year.
Ross allegedly directed the online lender to make “rebate” payments on more than 1,000 delinquent loans to create the impression that they were current. Quarterspot has not been accused of any civil or criminal wrongdoing.
The SEC included in its complaint that Ross expressed concern about the scale of loan delinquencies.
“…more loans are going late each month than I can afford and still have normal returns, so that the can we are kicking down the road is growing in size,” he wrote in an email. It was dated February 8, 2015.
It’s a sentiment that seems to disprove his early premise that “the asset class works even when the collection process doesn’t.”
Ross is innocent until proven guilty, but an excerpt of an interview with him in 2014 is now somewhat ironic.
“I [understand] that people end up sometimes in the [industry] who have had colorful careers in the securities space. It doesn’t make it impossible for me to work with them,” he said. “But if they had been in the big house for white collar crime, then that is probably a non-starter.”
