More than two years after the SEC charged Direct Lending Investments with fraud, work is still being done to manage the fallout. The firm was placed into receivership and since then $102.83M has been distributed back to 739 investors. Overall, the Receiver expects to recover somewhere between $215M and $265M, far short of the $789.6M supposed portfolio value at the time the Receiver took over.
Much of the shortfall can be attributed to poor investments in businesses that fell outside of what it promoted to investors. For example, $191M is tied up (and likely unrecoverable) in international telecom receivables, a far cry from the online lending industry it claimed to deal exclusively with.
Direct Lending’s former CEO, Brendan Ross, is still out on bail pending trial on related criminal fraud charges. He was indicted in August 2020. The trial was recently postponed and is now scheduled to take place on March 1, 2022.
One party that took heat over Direct Lending Investments, was the firm’s auditor, Deloitte. The Receiver sued Deloitte over the firm’s “improper clean audit opinions” in 2016 and 2017 that helped create the perception that Direct Lending Investments was managing its business on the up and up. Deloitte settled the case and agreed to pay $31M.
SoFi put up a dastardly net loss of $165.3M last quarter on only $231.3M in net revenue.
The hit should be a one-off, according to the company.
We remeasured our valuation allowance during 2020 as a result of the deferred tax liabilities recognized in connection with our acquisition of Galileo, which decreased the valuation allowance by $99.8 million. The absence of that tax benefit, together with significant non-cash stockbased compensation expenses and fair value changes in warrants primarily related to the fair market value of SoFi stock, were the largest contributors to the current period net loss.
Justin Cheng’s website said his company, Celeri Network, could help business owners get a loan between $5,000 and $5 million. Rife with all the familiar lingo commonly found on loan broker websites, Celeri Network gave the appearance of an everyday small business finance company.
Unfortunately for unsuspecting customers, Cheng took his own approach with applicants, telling them that they had to pay upfront refundable “due diligence fees” to help them secure funding. Of course, when the funding never came through, he failed to deliver refunds to the tune of $380,000.
That was only the tip of the iceberg for Cheng who was sentenced to 72 months in prison this week for a litany of schemes including this one.
According to the Department of Justice, “Cheng used the identity of other individuals to submit online applications to the SBA and at least five financial institutions for a total of over $7 million in government-guaranteed loans through the SBA’s PPP and EIDL Program for several companies controlled by CHENG, namely Alchemy Finance, Inc., Alchemy Guarantor LLC d/b/a “Celer Offer,” Celeri Network, Inc., Celeri Treasury LLC, Wynston York LLC, and Neo Bellum Industries Inc.”
Representing also that he had more than 200 employees when he never had more than 14, he successfully secured $2.8M in PPP funding altogether.
“Cheng transferred over $1 million abroad, withdrew approximately $360,000 in cash and/or cashier’s checks, and spent at least approximately $279,000 in PPP loan proceeds on personal expenses,” the DOJ found. “These personal expenses included the purchase of an 18-carat gold Rolex watch for approximately $40,000, rent and move-in fees for a $17,000 per month luxury condominium used by CHENG, approximately $50,000 of furnishings for the condominium, a portion of the purchase of a 2020 S560X4 Mercedes, and purchases totaling approximately $37,000 at Louis Vuitton, Chanel, Burberry, Gucci, Christian Louboutin, and Yves Saint Laurent.”
Far from finished, Cheng also announced the launch of a blockchain-based peer-to-peer lending platform and sold more than $400,000 in digital tokens through “materially false and misleading statements and omissions.”
“Cheng, 25 of New York, New York, pled guilty on April 20, 2021, to one count of major fraud against the United States, one count of bank fraud, one count of securities fraud, and one count of wire fraud,” the DOJ said.
Immediately following news of a management shakeup, small business lending company IOU Financial introduced a first-of-its kind offering to eligible customers, cash back.
“Available only to qualified new clients,” as the announcement says, the IOU Cash Back Loan enables borrowers to benefit from perfect payment history by receiving 3% of the original loan back in the form of a cash rebate.
According to Carl Brabander, the new EVP of Strategy, this is not a gimmick where the rebate can only be applied to a future loan or loaded up onto a gift card.
“The merchant would receive the cash back amount by ACH directly to their bank account,” he writes, “provided they (a) have a perfect repayment history and (b) apply for the rebate within 30 days of repaying the loan, using the cash back certificate we would have sent them when the loan closed.”
Translated into dollars, this reward could be sizable given that IOU’s average loan size hovers around $100,000 and can go much higher.
“The IOU Cash Back Loan gives us the opportunity to give something back to new clients that put their faith in us to fund their growth plans,” said IOU CEO Robert Gloer in a public statement.
The cash-back loan concept was developed scientifically through focus group testing, the company claims.
The sudden flurry of activity emanating from IOU can probably be attributed to a deal struck last year when Neuberger Berman, an investment manager with $374B under management, acquired a 15% stake in the firm.
Brabander says that IOU is very bullish on the rest of the year and 2022.
“We see small business coming back strong now that the 2nd round of PPP has finished working its way through the system,” he says. “That’s why we’re investing heavily in products (ex. Cash Back), technology (our IOU360 platform) and distribution right now…”
Small business lender IOU Financial is undergoing one of the largest management shakeups of 2021. The company announced a slew of new hires and new roles for existing team members early this morning.
Joining the company are:
- Carl Brabander, EVP of Strategy
- Jason Stevens, VP of Loss Mitigation
- Sam Abolgar, VP of Finance (US)
New roles are as follows:
- Madeline Wade, EVP Operations
- Stewart Yeung, EVP of Finance
- Jeff Turner, EVP of Risk Mitigation
- Richard Zapata, VP of Engineering
- Lori Haygood, VP of Compliance
IOU founder Phil Marleau also recently completed his planned transition from CEO to an advisory role. President and COO Robert Gloer has taken over as CEO as previously announced.
The burst of change at IOU is perhaps unsurprising given that Neuberger Berman, an investment manger with $374B under management, acquired a 15% stake in the company last year.
“IOU’s new management structure lays the groundwork for growth and innovation,” Gloer said in a public statement. “With this team in place IOU Financial has never been in a better position to achieve rapid growth through innovation in the areas of technology, products and distribution.”
Enova, the international lending firm that owns the OnDeck brand, reported Q2 small business loan originations of $400M. That brings the year-to-date figure to $722M, approximately half of the volume OnDeck was producing prior to Covid. (OnDeck’s 2019 originations were $2.475B)
“OnDeck’s performance continues to exceed our expectations,” said Enova CEO David Fisher during the quarterly earnings call, “and we will easily exceed our forecast of $50 million of annual cost synergies, primarily from eliminated duplicative resources, as well as $15 million in run rate net revenue synergies.”
Cash has also come pouring in.
“…While we originally thought that OnDeck’s legacy portfolio would have very little value, we now expect to receive over $220 million of total cash from the acquired portfolio, net of securitization repayments,” Fisher said. “In fact, we’ve already realized over $100 million from the legacy portfolio.”
Although ISOs (aka brokers) will remain an important part of driving OnDeck’s growth, Enova is happy that OnDeck brings more to the table.
“The good news about OnDeck, is at least they had a direct channel and a pretty good direct channel because of their terrific brand on the small business side, where our small business products had no direct channel,” Fisher said. “It was all through ISOs. So, we gain that capability through OnDeck.”
Enova reported $80M in net income for the quarter on $265M in revenue.
In an age of changeups, the talent or tech a firm acquires has increasingly become what sets them apart from the pack.
Yes Lender, a funder based in Pennsylvania, recently teamed up with MCA AI underwriting startup Edge Funder. Yes bought Edge and will bring co-founders Amotz Segal and Kobi Ben Meir to the team as Vice President of Business Development and Chief Marketing Officer.
Segal, an industry vet with a decade of experience in MCA, said it was a great time to join forces and grow.
“[Yes Lender] weathered this pandemic in a pretty impressive way, I would say,” Segal said. “What they see now is an opportunity to take advantage of the post-pandemic market and the need for a more sophisticated data driven system to improve their chances to become one of the biggest names in this industry.”
Surviving the pandemic in style is something Yes Lender and Edge have in common. Back in 2019, Segal left Yalber and started an investment consulting firm. By May 2020, the pandemic had soured business, but he and his co-founder Ben-Meir saw an opportunity.
“During the pandemic, I realized fairly quickly that many of the MCA companies are going to go out of business because of the nature of the shutdown,” Segal said. “So I decided to take the opportunity and apply my experience, knowledge, and start my own platform.”
The idea was simple, he said: create something that would address the pain points of the industry. They worked with the concept of building a platform that treated business owners just as consumers are treated in consumer finance. They began generating leads directly from SMBs like a consumer funding product, though Segal said they would always be focused on working with ISOs as well.
Next, they focused on turning the application process into a seamless, automated process. While the MCA industry can fund in 24 or 48 hours, the consumer credit world still has it beat, with card applications processed in as little as 30 seconds. That is the target time for online MCA applications, Segal said.
He said they look forward to being a part of the Yes Lender team and executing that vision. Glenn Forman, CEO of Yes Lender, said in a release that the firm is fortunate to have joined forces with Edge.
“Their lead generation and direct-to-merchant funding platform are terrific complements to Yes Lender’s thriving ISO-driven sales channel,” Forman said. “Moreover, the addition of artificial intelligence to our already robust array of data-driven risk assessment tools will further strengthen our underwriting.”
Amazon merchant conglomerate Thrasio bought Yardline to incorporate e-commerce finance into the product offering. Thrasio has been active with Yardline since the firm’s initial backing of the company, and is now making Yardline a wholly owned subsidiary.
Yardline Chief Revenue Officer Seth Broman said that historically, e-commerce has been risky with no barrier to entry like traditional brick and mortar shops. Broman added that online stores used to be for supplements, but through Amazon’s third-party marketplace and Shopify’s help, scaling a quality business has become possible.
“Through COVID, the script was flipped,” Broman wrote in a statement. “E-commerce businesses became less risky, and brick-and-mortar businesses suffered the most. It’s also a much smaller universe and harder to target than a brick-and-mortar business.”
Thrasio boasts it is the largest acquirer of Amazon brands globally, and co-founder and co-CEO Carlos Cashman said 40% of brands they approach end up selling. Now, they can help scale those brands.
“Yardline will be an asset in creating more opportunities for these entrepreneurs and offering more sophisticated avenues for growth,” Cashman said in a statement. “They’ve been doing something different in the space—their strategic approach to providing embedded capital across e-commerce marketplaces is unique—and we’re eager to have their technology and proficiency on our team.”
Tomo Matsuo, president of Yardline, will be joining Thrasio’s senior leadership team. “It’s conceivable that every eCommerce-related platform will have FinTech capabilities in the future,” he said in a statement. “And our acquisition by Thrasio demonstrates that.”