The case of the missing $50 million in the Prime Capital Ventures deposit scheme case is quickly ballooning to a much larger sum. On Tuesday, the Receiver representing Prime in the recovery efforts informed the Court that the total owed to victims is now almost $91 million and that it has yet to locate and secure anywhere near that amount. The growing number is attributed to the fact that more victim companies are beginning to come forward after news of the receivership and personal bankruptcy of Prime’s principal Kris Roglieri have been made public.
Roglieri’s attorney has asked the Court for the automatic stay of actions afforded to him in his personal bankruptcy be also applied to the other businesses he owns that the Receiver of Prime is suing, including the National Alliance of Commercial Loan Brokers entity. Roglieri is reportedly the 100% owner of the NACLB.
The party that sued Prime into receivership in the first place, a company named Compass-Charlotte 1031, LLC, said in its rebuttal to Roglieri’s request that not only is Prime indisputably insolvent but that there is no evidence that Roglieri’s other businesses at issue are not equally insolvent. Compass-Charlotte and the Receiver have both asked the Court not to extend the bankruptcy stay to these other businesses so that Prime can continue to pursue the assets.
A series of legal disputes between creditors and Prime Capital Ventures, LLC has taken an interesting turn. Originally, creditors forced Prime Capital Ventures, LLC, a commercial real estate financing firm, into involuntary bankruptcy late last year but withdrew it after a review determined that the assets they sought were allegedly no longer in the possession of the defendant. Despite this, related lingering issues kept the entity in receivership and on Jan 24 the Court appointed a permanent receiver. The Receiver, on behalf of Prime, then filed a lawsuit against its owner Kris D. Roglieri and his related entities including Prime Commercial Lending, LLC, Commercial Capital Training Group, The Finance Marketing Group, FUPME, LLC, and the National Alliance of Commercial Loan Brokers LLC and other individuals for the recovery of assets related to Prime.
The Receiver opens the lawsuit by saying that “This case involves what appears to be a multi-state fraud scheme with victims holding claims for well over $50 million for return of deposits, which were paid and then not returned.”
On February 2, FBI agents executed search warrants at the homes of Roglieri and Kimberly Humphrey, according to a letter filed by a lawyer for Prime which was reviewed by deBanked. They are in the process of getting separate criminal defense counsel, according to that letter.
The lawsuit by the Receiver against Roglieri et al can be viewed here.
The RBFC has filed a lawsuit against the CFPB over its data collection rules that are scheduled to go into effect this year.
As readers may recall, the federal regulator created 888 pages of rules governing how small business lenders (including MCA companies) will be required to collect and submit data for federal analysis.
At first, it appeared that the CFPB had way overstepped its bounds when Congress, on a bi-partisan basis, passed a resolution to scrap the rules. President Biden, however, then took the unprecedented step of vetoing their resolution on his belief that the rules were necessary to “conduct oversight of abusive and predatory lenders.”
One week after the veto the RBFC filed its lawsuit.
Although the CFPB is required by law to collect small business loan data pursuant to Section 1071 of the Wall Street Reform and Consumer Protection Act, the plaintiff took umbrage with the CFPB’s allegedly deliberate misinterpretation of the words “credit” and “loan” as they’re written in that statute. That’s because the CFPB unilaterally decided those terms also apply to MCAs/Sales-Based-Financing agreements. The RBFC contests that the CFPB has the legal authority to include products outside the scope of the federal statute and asks the Court to declare the rules invalid as they apply to sales-based financing.
The Small Business Finance Association will appeal the decision issued in its case against the California DFPI over the legality of its disclosure laws.
The SBFA filed its suit in December 2022, alleging that the disclosure laws in California violated the First Amendment and that they were pre-empted by a federal law (TILA) that governs APR calculations. After the Court initially allowed the case to proceed in March 2023, it reversed course and dismissed the SBFA’s lawsuit in December.
On December 29, the SBFA filed its notice of appeal to the United States Court of Appeals for the Ninth Circuit.
Jeffrey S. Paige is the General Counsel of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
Staying compliant with disclosure legislation and regulations is paramount for revenue-based financing funders and brokers alike. In states such as California, Virginia, Utah, New York, Georgia, Connecticut, and Florida, there are specific requirements to which commercial financing funders must adhere. Funders and brokers who fail to comply with these requirements could face significant legal and/or financial penalties. Funders and brokers are encouraged to consult their legal counsel to ensure full compliance with all laws and regulations of every state in which they transact business.
California Code of Regulations Title 10, Chapter 3 – California Financing Disclosure Law (Effective December 9, 2022):
Starting on December 9, 2022, commercial financing funders in California are required to provide clients with certain disclosures, including the controversial APR calculation. This became mandatory following the issuance of final regulations by the California Department of Financial Protection and Innovation (DFPI) on June 15th to implement the California Code of Regulations Title 10, Chapter 3. Violations of these disclosure requirements in California can lead to significant penalties, reaching up to $10,000 for willful violations, along with the possibility of imprisonment for licensees who commit violations. To maintain compliance and avoid penalties, consult with your counsel to ensure your disclosures are timely and set forth all required information, including but not limited to:
- Total amount of funds provided
- Total dollar cost of the financing
- Term or estimated term
- Payment details
- Prepayment policies
- Total cost of financing expressed as an annualized rate
Virginia HB1027 – Virginia Financing Disclosure Law (Effective July 1, 2022):
Virginia enacted HB1027, introducing disclosure and registration requirements for sales-based financing funders. Funders conducting business in Virginia are obligated to conform to these regulations, which include but are not limited to:
- Registration: Funders and brokers in revenue-based financing must register with the State Corporation Commission and subsequently renew annually.
- Disclosures: Disclosures for specific financing offers are mandatory, covering total financing amount, finance charges, total repayment amount, estimated payments, payment amounts, and applicable fees.
- Virginia’s Distinction: Unlike California and New York, Virginia does not mandate the disclosure of an annual percentage rate (APR), focusing on the disclosure of the total cost of capital.
Non-compliance with Virginia HB1027, the Virginia Financing Disclosure Law, exposes businesses to substantial penalties. The law empowers the Virginia Attorney General to seek injunctions for violations, in addition to restitution payments, damages, and attorney’s fees for violations.
Utah SB183 – Utah Financing Disclosure Law (Effective January 1, 2023):
Engaging in a commercial financing transaction as a provider in Utah or with a Utah resident has become unlawful unless one is registered with the Utah Department of Financial Institutions (DFI). This registration, akin to California’s process, must be renewed annually through the Nationwide Multistate Licensing System (NMLS). Utah’s unique framework explicitly states that non-compliance does not affect the enforceability of transactions, nor do violations give rise to a private cause of action against the funder. However, civil penalties are not to be underestimated. Violators can face penalties of $500 per violation, not exceeding $20,000 for all violations. For repeat offenders, especially those who receive written notice of prior violations, penalties can escalate to $1,000 per violation, capped at $50,000. To ensure compliance with Utah SB 183 and avoid legal trouble, ensure proper and timely registration and annual renewal. Also, consult with counsel to prepare the required disclosures, which feature (but are not limited to) the total amount of funds provided, the total cost of financing, and any other pertinent material terms and associated costs as required by the regulations.
New York Commercial Financing Disclosure Law (August 1, 2023):
The New York Commercial Financing Disclosure Law (CFDL) mandates standardized disclosures for unregulated financial institutions engaged in commercial financing transactions. Funders failing to comply may face civil penalties, with fines reaching up to $2,000 per violation or $10,000 for intentional violations. In addition, for knowing violations, the Superintendent of the Department of Financial Services can impose restitution payments and/or injunctive relief. Disclosures include, but are not limited to:
- The total amount of funds provided
- The total cost of financing (expressed as an annualized rate)
- A description of the financing product
- Other material terms and fees
- The name and contact information of the funder
- A statement that the borrower has the right to cancel the deal within three business days of receiving the disclosures
- Timing: The disclosure must be given to the borrower when a specific commercial financing offer is made.
- Any portion of the amount financed used to pay unpaid finance charges or fees (referred to in the legislation as “double dipping.”)
Funders should proactively integrate these disclosures to align with New York’s regulatory standards and foster a culture of accuracy and responsibility in commercial financing practices.
Georgia Commercial Financing Disclosure Law (Effective January 1, 2024):
Effective January 1, 2023, Georgia’s Commercial Financing Disclosure Law mandates clear and detailed disclosures for commercial financing funders. The law amends Georgia’s Fair Business Practices Act, applying specifically to providers of commercial loans and accounts receivable purchase transactions under $500,000. Transactions are defined as purchases of accounts receivable or payment intangibles, strategically avoiding loan classification, and notably, no licensing or registration requirements are imposed on funders. Funders failing to comply with these disclosure requirements face potential civil penalties, ranging from $500 to $20,000, with additional penalties for continued non-compliance after notice. Importantly, these penalties do not compromise the enforceability of the transactions, and it is noteworthy that the law does not grant a private right of action.
- Providers must disclose key terms: total funding amount, net funds disbursed, total payable, financing cost, payment schedule, and prepayment penalties.
- Unlike California and New York, Georgia’s law does not mandate APR calculation.
- The definition of “Providers” is consistent with Utah’s Commercial Financing Registration and Disclosure Act.
- Covers those engaging in more than five commercial financing transactions in Georgia annually, including online platforms partnering with depository institutions.
Florida Commercial Financing Disclosure Law (Effective July 1, 2023):
Effective from July 1, 2023, commercial financing funders in Florida are mandated to comply with the requirements of the Florida Commercial Financing Disclosure Law.
Florida Law Disclosure Requirements:
Non-compliance with these regulations can result in fines ranging from $500 per incident to an aggregate of $20,000, with possible aggregate penalties up to $50,000 for continued violations after receipt of notice. As with other states, transparency in financial dealings is paramount, and funders should stay updated on regulatory changes to ensure continuous compliance.
Connecticut Financing Disclosure Law (Effective July 1, 2024):
Connecticut sets a clear deadline for funders and brokers to register with the state banking commissioner by October 1, 2024. Additionally, the Connecticut Financing Disclosure law requires funders to disclose:
These regulations apply to entities providing commercial financing, and failure to comply can result in severe civil penalties of up to $100,000. The commissioner additionally holds the authority to enjoin those violating the statute. Understanding and fully complying with these requirements is crucial for funders and brokers that transact business in this state.
The Imperative of Adhering to Evolving Commercial Financing Disclosure Laws
The regulatory frameworks in California, Virginia, Utah, Georgia, New York, Florida, and Connecticut, coupled with impending regulations in other states, underscore a growing regulatory focus on transparency, customer protection, disclosure and equitable financial practices. With revenue-based financing facing heightened scrutiny, the strict compliance with these laws cannot be emphasized enough. Ensuring adherence is not just a best practice but a crucial necessity to avoid potential legal penalties and foster a financial ecosystem built on trust, integrity, and responsible funding practices.
A merchant processing ISO was arrested by federal agents this week for his alleged role in a business loan fraud scheme. Paul Paredes, who owns J&E Business Consulting LLC in Rochester, NY, allegedly used the identities of his merchant processing clients to obtain business loans for himself.
“Small businesses provide J&E with their financial information, such as the owner’s identifying information, including driver’s license, social security number, and email, as well as bank account information,” the Assistant US Attorney said.
According to the complaint, between May and November 2022, Paredes fraudulently submitted approximately 42 loan applications using the identities of approximately 31 individuals, enabling him to obtain millions of dollars. He used the money to pay off one victim, pay other loan companies, and he used it on personal expenses such as credit cards, travel, and vehicles.
Paredes is also facing a related civil lawsuit over the matter. According to public records, his company has also used and defaulted on several merchant cash advances from as far back as 2016 to as recent as this year.
“Although a comprehensive analysis of all known accounts has not yet been completed, the financial transactions in the [bank] accounts appear to be consistent with Paredes laundering the fraudulent loan proceeds obtained from the lender companies, which are proceeds of a Specified Unlawful Activity, namely wire fraud, in a similar fashion to a ‘Ponzi scheme’ and inconsistent with the operations of a legitimate business enterprise,” an FBI agent said in an affidavit.
While New York’s Appellate Division has previously decided what’s not usury when it comes to MCA transactions, the Second Department has now ruled what is.
On Wednesday, the Court issued its decision in Crystal Springs Capital, Inc v. Big Thicket Coin, LLC et al, a case that had otherwise started out as a routine breach of contract action related to the purchase of future receivables in the New York Supreme Court back in September of 2020. When defendants never appeared, the plaintiff obtained a default judgment eleven months later. That sparked a response from the defendants who then sought to vacate it on several grounds, including by arguing that the underlying agreement was really a criminally usurious loan. The Court rejected the argument for several reasons, citing that the “reconciliation language in the Agreement is nonillusory” and stating plainly that “a merchant cash advance agreement is not a loan and therefore its terms are not usurious.” Vacatur denied. Defendants appealed.
In the new Decision & Order, the Court said that “the defendants established that the agreement constituted a criminally usurious loan.” In support of that outcome, the Court said that the plaintiff was “under no obligation” to reconcile the payments and that the full uncollected purchased amount plus all fees were due in default even if the business declared bankruptcy. (View contract at issue here)
“Together, these terms established that the agreement was a loan, pursuant to which repayment was absolute, rather than a purchase of future receipts under which repayment was contingent upon the Big Thicket defendants’ actual sales,” the Court said. “The plaintiff does not dispute that the agreement effected an annual interest rate exceeding the criminally usurious threshold of 25%.”
A lawsuit brought by Samson MCA LLC against Joseph A. Russo M.D. P.C./IV Therapeutics PLLC, DBA Aspire Med Spa & Joseph Russo & Marco V Beatrice has brought revenue purchase agreements back in to the legal spotlight in New York State. Once again its been affirmed that they’re not loans.
In May 2021, plaintiff Samson MCA sued defendants for breach of contract and won on summary judgment despite defendants’ contentions that the revenue purchase agreements at issue were actually “criminally usurious loans.” Defendant Marco V Beatrice appealed. After a very careful analysis of the agreements, a final decision was issued by the Appellate Division, Fourth Department on August 11, 2023.
“On appeal, [defendant] contends that the agreements are void because they are criminally usurious loans and that the court therefore erred in granting plaintiff’s motion and denying defendants’ cross-motion with respect to him,” the Court stated. “Thus, the central question before us is whether the two agreements were, in fact, revenue purchase agreements or whether they were, instead, loans.”
The Court said that when determining whether a transaction constitutes a loan, courts must determine whether the amount is repayable absolutely or under all circumstances:
“Usually, courts weigh three factors when determining whether repayment is absolute or contingent:
(1) whether there is a reconciliation provision in the agreement;
(2) whether the agreement has a finite term; and
(3) whether there is any recourse should the merchant declare bankruptcy”
Contrary to [defendant’s] contention, plaintiff established as a matter of law that the agreements were revenue purchase agreements rather than loans, and [defendant] failed to raise a triable issue of fact with respect thereto (see Principis Capital, LLC, 201 AD3d at 754). Here, the agreements submitted by plaintiff contained reconciliation provisions requiring the adjustment of the remittance amount upon request based on changes to the entity defendants’ revenues, and had no finite term and no payment schedule. Additionally, as noted, each agreement contained an acknowledgment “that [plaintiff] may never receive the purchased amount in the event that [the entity defendants’ business] does not generate sufficient revenue” and, for the most part, plaintiff did not have recourse in the event that the entity defendants declared bankruptcy (see Streamlined Consultants, Inc. v EBF Holdings LLC, 2022 WL 4368114, *5 [SD NY, Sept. 20, 2022, No. 21-CV-9528 (KMK)]).
We have reviewed [defendant’s] remaining contention and conclude that it does not warrant reversal or modification of the judgment.
The original lawsuit can be found under Index No. 129401/2021 in the New York Supreme Court.
Full decision by the Appellate Division, Fourth Judicial Department can be found here.