Legal Briefs

The FTC’s Power to “Wipe Out” is Under Siege

October 9, 2020
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ftc office washington dcAs the FTC contemplates how to “wipe out” entire industries, federal courts around the country have recently ruled that the regulator can’t accomplish such a goal under Section 13(b) of the FTC act. That’s the statute the FTC relied on to bring its most recent actions against merchant cash advance companies. It might not have bite.

Under 13(b), the FTC is empowered to bring a lawsuit to obtain an injunction against unlawful activity that is currently occurring or is about to occur. It’s powerful, but very limited. However, for the last several decades, the FTC, with the help of federal courts, has interpreted the statute to mean that it can also force the defendants to “disgorge” with illegally obtained funds.

That’s how the FTC wiped out Scott Tucker and his payday lending empire. In a lawsuit the FTC brought against his companies under 13(b) in 2012, the Court entered a judgment of $1.3 billion against him.

Not so fast, modern legal analysis says. Tucker’s case is being brought before the Supreme Court of the United States to settle once and for all what 13(b) allows for and what it doesn’t.

The momentum does not weigh in the FTC’s favor.

On September 30, the Third Circuit ruled in FTC v AbbVie that the FTC is not entitled to seek disgorgement under 13(b). The Seventh Circuit arrived at a similar conclusion last year in FTC v Credit Bureau Center.

In an interview with NBC, FTC Commissioner Rohit Chopra said in August “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”

As the FTC attempts to be more proactive in the area of small business finance, it will be important to monitor what the Supreme Court ultimately decides it can actually accomplish.

Important News for MCA Collection Actions in New York – Governor Cuomo Lifts New York Civil Litigation Tolling Deadlines After November 3, 2020

October 9, 2020

Albany, NY - Capitol BuildingOn March 7, 2020, Governor Andrew M. Cuomo issued Executive Order No. 202 Declaring a Disaster Emergency in the State of New York due to the COVID-19 pandemic. Executive Order 202 was followed by Executive Order No. 202.8 on March 20, 2020, which tolled (i.e., suspended) “any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state . . . until April 19, 2020.

In lay terms, Governor Cuomo’s Order suspended any statute of limitations deadline for the filing of a lawsuit, and perhaps more important for debt collection activities in the Merchant Cash Advance industry, suspended the deadline for obtaining default judgments in the State of New York. In other words, even after New York State Courts reopened in May, New York Courts could not issue default judgments against defendants who failed to appear in response to a summons and complaint in any civil action, including collection actions, if the date of default for non-appearance occurred after March 20, 2020.

The Governor’s suspension of court deadlines continued well past the initial April 19, 2020 deadline, being extended by numerous executive orders throughout the summer and early fall. The most recent executive order, Executive Order No. 202.67 issued on October 5, 2020, extended the tolling deadline again until November 3, 2020.

But there is hope in sight. In addition to extending the suspension of court deadlines, Executive Order 202.67 states, “for any civil case, such suspension is only effective until November 3, 2020, and after such date any such time limit will no longer be tolled.”

The good news here for debt collection professionals is that deadlines in civil cases in New York State will begin to accrue again as of November 4, 2020. What this means is that any civil action properly served on a defendant that was suspended as of March 20, 2020, will begin to accrue again on November 4, 2020.

In summary, for the debt collection professionals in New York State, this means a return to business as usual on November 4, 2020.

Austin LLP is a law firm that supports the Merchant Cash Advance industry. As such this article is attorney advertisement. The opinions reflected in this article are those of the author and should not be construed as legal advice.

Yellowstone Capital Moves to Dismiss FTC Lawsuit

October 3, 2020
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Yellowstone LogoNewly revealed in court documents filed on Friday is that the recent FTC lawsuit against Yellowstone Capital culminated after a 2-year inquiry. What may have been a surprise to the Yellowstone defendants is how the FTC brought its case or that it ultimately even decided to bring one at all. A motion to dismiss has been filed.

Specifically, counsel for Yellowstone references in its papers that in the preceding years, Yellowstone had already complied with FTC discovery requests that amounted to the production of “24,000 pages of documents, more than 1,400 audio recordings, and responses to numerous interrogatories and follow-up inquiries.”

Following that, the FTC filed suit on August 3, 2020, alleging Misrepresentations Regarding Collateral and Personal Guarantees, Misrepresentations Regarding Financing Amount, and Unfair Unauthorized Withdrawals. In it, it relies heavily on alleged materials dating as far back as five years ago to make its case.

This is fatal to the FTC’s suit, the defendants contend, because the FTC laid out its claims under a very specific statute of the FTC Act, Section 13(b), which can only be brought in federal court if they believe a defendant “is violating, or is about to violate” this area of the law. Past conduct, they say, even if it were true, is not applicable. No acts in 2020 or even from 2019 are alleged with any particularity, nor is it said that any might be happening or will happen.

Some of the purported web pages, ads, or contracts that the FTC refers to no longer exist, have long since been replaced, were taken out of context, or could not even be identified as to where or whom they even originated from, defendants say.

Defendants make further arguments for dismissal, one of which takes issue with alleged quotes or comments made by anonymous merchant customers. “The Complaint does not indicate, for instance, if these unidentified customers had breached their MCA agreements or otherwise incurred additional fees beyond the Purchased Amount that were due and owing to Yellowstone under their respective agreements.”

Deprived of all context and specifics, the complaint is loaded with elements that look bad but fall well short of the necessary legal burden, defendants essentially argue.

“The FTC has overextended itself in this litigation,” defendants say in their papers.

They further raise concern that it arises from a possible personal agenda rather than a legally-founded one. Reference is made to an NBC interview in which FTC Commissioner Rohit Chopra told the interviewer that “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”

Chopra had also issued an official statement regarding Yellowstone in which he expounded almost entirely on legal questions that were not even raised in the lawsuit itself but create the impression that they are.

Yellowstone has asked for a stay of discovery pending the outcome of the motion to dismiss.

You can read Yellowstone’s full motion to dismiss here.

The FTC’s interest in this area of finance has been known for some time.

Another Attorney Charged Criminally in 1 Global Capital Saga

September 29, 2020
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Wall Street Rips You OffAndrew Dale Ledbetter, a veteran securities attorney who once co-authored a book called How Wall Street Rips You Off – and what you can do to defend yourself, now stands accused of ripping investors off.

Ledbetter was criminally charged on Tuesday by the US Attorney’s office in South Florida for his alleged role in the 1 Global Capital Securities fraud case. Ledbetter was formally accused of Conspiracy to Commit Wire Fraud and Securities Fraud. He was simultaneously hit with civil charges by the Securities and Exchange Commission.

Both agencies say that Ledbetter reaped nearly $3 million in referral fees from 1 Global Capital in exchange for raising nearly $100 million from investors, mostly retirees, all while making knowingly false statements and misrepresentations about the investments. For instance, they say that he knew the investments were securities but claimed they weren’t anyway. Similar circumstances brought down Florida attorney Jan Douglas Atlas last year. Ledbetter had been compensating Atlas on the side as part of the alleged scheme.

Ledbetter is the 4th individual to be criminally charged in connection with the 1 Global Capital case. The other three: Atlas, Alan G. Heide, and Steven Schwartz, have all already pled guilty.

Business Loan Broker “The Tyrant” Sentenced to at Least Five Years in Prison

September 10, 2020
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The owner of a Long Island business loan brokerage convicted of orchestrating an advance fee loan scheme, was sentenced to prison this week. The judge handed Demetrios Boudourakis five to ten years and ordered him to pay a total of $880,000 in restitution to victims.

Boudourakis solicited business owners for a loan and then charged them an upfront fee when no loan was actually forthcoming. He pled guilty in June to the charge of grand larceny in the 2nd degree.

NYC Restaurants Have Had Enough, Two Lawsuits Filed to Reopen Indoor Dining

September 9, 2020
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class action lawsuitThe five buroughs of New York City are still quiet. Restaurants remain closed to inside dining; gyms still await their regulars to return (beefcakes deflating with inactivity), and in-person schooling has been pushed back once again, while the districts take an extra week to prepare.

Through it all, business owners are losing money. Some have had enough.

Il Bacco, an Italian restaurant in Queens, is leading the charge. The restaurant recently filed a $3 billion class-action lawsuit against New York, signed by more than 300 restaurants. Il Bacco is a three-story eatery in Little Neck, 500 feet from the Nassau county border where restaurants can open to 50% capacity.

Another group of restaurants met separately at a rally in Staten Island to speak out against the inaction of lawmakers and to formally propose a separate lawsuit to force the reopening of restaurants.

On behalf of Bocelli, Joyce’s Tavern, and the Independent Restaurant Owners Association Rescue- (IROAR) papers were filed in Richmond County, calling for the emergency opening of restaurants throughout NYC at 50% capacity. IROAR was started last week as a confederation of 14 disgruntled restaurants. More recently the association has grown to 180 members.

Tina Maria, daughter of the owner at Il Bacco, also started an online petition with more than 5,000 signatures at writing.

On Sept 9th, shopping malls can open to 50% capacity and Casinos to 25% capacity, but restaurants like Il Bacco still struggle to make up for six months of decreased activity.

In speaking at the rally on Tuesday, Bob Deluca owner of Delucas Italian Restaurant said he and his workers have put in hundreds of hours of work a week just to see government officials keep his business from opening. Now he said, enough is enough.

“We’re being discriminated against, we’re being bullied,” Deluca said. “My mother told me to always stand up to bullies and stand up for people in need who are being bullied. Right here, this is our knockout punch.”

Deluca dropped the lawsuit on the podium, punctuating his frustration. He said he never wanted it to come to this, but it has come to it. Deluca reacted to Mayor Bill de Blasio’s comment from two weeks ago, stating restaurants were for the middle class and wealthy people.

“We are workers, it’s not a luxurious lifestyle, we are barely middle class,” Deluca said. “What about the waiters, the busboys, what about the dishwashers the bartenders, and the cooks. To say restaurants are for the middle class and wealthy is the most ignorant statement I’ve ever heard.”

OnDeck Directors Sued in Class Action For Allegedly Withholding “Material Information” From Shareholders To Make Enova Deal Happen

September 8, 2020
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NASCAR - Black and WhiteAn 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.

Par Funding, Looks Bad But May Still Have Been a Better Investment Than OnDeck?

September 2, 2020
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Mind BlownBuried deep in the bowels of the salacious news articles coming out about Par Funding, the small business funding company that was raided by the FBI and forced into a court-ordered receivership, is that Par Funding investors probably stand to recover more of their funds than early shareholders of OnDeck.

That’s the early indication based upon a report prepared by DSI, a consulting firm hired by Par’s Receiver. As of the 4th quarter of 2019, Par Funding purportedly had $420 million in MCA receivables and $21.7 million in cash while claiming that only $365 million was still owed to investors.

Could be worse?

At the heart of this case is just how solid Par’s receivables are. The SEC claims that hundreds of millions may be lost but isn’t entirely sure how much. As evidence, they point to more than 2,000 lawsuits Par has filed since inception against defaulted customers and assert the unlikelihood that Par and affiliated individuals could have reasonably claimed to have had a 1% or 2% default rate.

Par in its defense has said that the SEC has made “no attempt to address the successful recovery rate of Par Funding’s litigation or, more fundamentally, how this litigation correlates to a cash over cash default rate.”

Par has made several references to a cash-over-cash default rate in its court papers. In an August 9 filing, attorneys for Par say that the company’s cash-over-cash default rate is “perhaps the best in the industry.”

But even if it is, deBanked spoke with some accountants knowledgeable about these products that said that a cash-over-cash calculation would not normally be a formula one would use to express meaningful portfolio performance. They spoke generally as they did not have knowledge about Par’s books or personal methodologies.

And absent such knowledge of how Par calculated it, Par insists in its papers that it has the right to show that it did not misrepresent the default rate (and that it should have had that opportunity before being placed in receivership in the first place).

It doesn’t help that the SEC has made contradicting arguments about defaults. While implying that 50% of the money is in default ($300 million of $600 million funded is allegedly tied up in lawsuits, they say) they simultaneously state in their Amended Complaint that an analysis of these lawsuits reveals that Par’s “default rate is as high as 10%.”

One has to wonder, if that’s true, if a forced-receivership over such a company was warranted because the SEC thought that their default rate might be as high as… 10%.

A rival alternative business lender, OnDeck, had reported a default rate of 5% in 2013, 18 months before going public at a $1.3 billion valuation. At the time, company CEO Noah Breslow told Forbes that a 5% default rate was “on a par with banks.” [sic]

On OnDeck’s June 30, 2020 balance sheet, the company set an allowance for credit losses at $173.6M against $901.1M in receivables, approximately 19%. That, of course, reflects the impact of COVID, which Par also argues it has had to contend with and that this should be considered in the big picture.

Safely secure from any raids, executives for OnDeck gathered on a conference call in late July to announce that they had been acquired by Enova at a share price of $1.38 that locked in a loss of more than 90% from their IPO ($20). After delving into the details, an analyst for Morgan Stanley offered a bit of praise. “Congratulations on the deal, guys,” he said before pivoting to a mundane question about the impact of economic stimulus on portfolio performance.

That same week, agents for the FBI were preparing to move in on the offices of Par Funding while the SEC filed a civil complaint under seal (and botched it.) Since then narratives have emerged about Par that include guns, jets, houses, data breaches, and alleged verbal exchanges. It’s a lot to take in.

But in the end it remains to be determined how much of Par’s purported $420M in MCA receivables can be collected. Even if for argument’s sake only $42 million were to be recovered (10%), an investor who put $1 into Par in 2014 and $1 into OnDeck stock in 2014 may somehow walk away a lot better by having bet on Par.

Happy 2020.

Sketchy Virginia SBA Loan Brokers Indicted

August 26, 2020
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Ronald A. Smith and Terri Beth Miller, owners of Virginia-based Business Development Group (BDG), an SBA loan brokerage, were indicted this month over an advance-fee scheme in which many customers are alleged to have paid money to obtain SBA loans but did not in fact get them.

As part of the scheme, defendants are alleged to have made many false and misleading representations to prospective borrowers including that:

  • BDG was a large, multi-state company
  • BDG was headquartered at the Trump Building in New York City and had an additional business in Las Vegas
  • BDG has assisted certain named companies in obtaining SBA loans
  • BDG was a business established in 2005 or earlier
  • BDG was affiliated with the SBA
  • BDG had relationships with banks across the nation that allowed it to facilitate the loan approval process with SBA lenders in a customer’s area by utilizing a “Lender Linker” made up of the most preferred SBA lenders in the country
  • BDG had a program that included a “Powerful Online Grant Writer Interface Service” that was directly connected to the federal government and “handled everything from A to Z in Finding, Writing, Submitting and Securing Grants”
  • BDG offered a money back guarantee
  • BDG won the 2016 Best of Manhattan Business Award for Business Development Software and Services

BDG was really just an internet-based business whose goal was to obtain money through fraudulent pretenses and promises, prosecutors contend.

A copy of the grand jury indictment can be obtained here.

Indictments Purportedly “Imminent” in Richmond Capital Group Case

August 25, 2020
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An attorney representing at least two individual defendants in the Richmond Capital Group case with the New York State Attorney General, has apparently been informed by a federal prosecutor that indictments are coming.

Richmond Capital Group was sued by the NY AG on June 10th, the same day that the Federal Trade Commission brought its own action.

Both before and since then, two individual defendants have attempted to avoid giving testimony in the AG investigation on the basis that it could be used against them in a looming criminal matter. As no criminal charges have been filed in connection with these civil actions against any such defendant so far, it has been challenging to get a judge to sympathize with the argument that the criminal matter is complicating their compliance.

But the imminence and reality of criminal charges appears to have ratcheted up, according to a recent hearing transcript that has been made public. The attorney representing two defendants in the AG case told the judge that the criminal matter is now in the hands of Louis Pellegrino, Assistant US Attorney for the Southern District of New York. According to a phone call he recalled having with AUSA Pellegrino, the AUSA stated that he will “unequivocally” bring indictments in connection with this case and that it’s “imminent.”

Also disclosed in the hearing transcript is that the New York District Attorney is said to have originally examined this case about two years ago and declined to file any charges. A federal prosecutor then picked it up instead.

It is worth noting that although the most high profile defendant in the AG and FTC cases concerning Richmond is an inmate named Jonathan Braun, Braun was not one of the defendants represented by the above referenced attorney and so as far as statements made about indictments go, nothing indicates that these in any way refer to him.

CEO Of Online Lender Arrested For PPP Fraud

August 19, 2020
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Mercedes-MaybachSheng-wen Cheng, aka Justin Cheng, the CEO of Celeri Network, was arrested on Tuesday by the FBI. Celeri offers business loans, merchant cash advances, SBA loans, and student loans.

Cheng applied for over $7 million in PPP funds, federal agents allege, on the basis that Celeri Network and other companies he owns had 200 employees. In reality he only had 14 employees, they say.

Cheng succeeded in obtaining $2.8M in PPP funds but rather than use them for their intended lawful purpose, he bought a $40,000 Rolex watch, paid $80,000 towards a S560X4 Mercedes-Maybach, rented a $17,000/month condo apartment, bought $50,000 worth of furniture, and spent $37,000 while shopping at Louis Vuitton, Chanel, Burberry, Gucci, Christian Louboutin, and Yves Saint Laurent.

He also withdrew $360,000 in cash and/or cashiers checks and transferred $881,000 to accounts in Taiwan, UK, South Korea, and Singapore.

This, of course, is all according to the FBI. Statements made to Law360 indicate that Cheng maintains his innocence.

A press release published by Celeri late last year said that the company had raised $2.5M in seed funding that valued the company at $11M.

Fintech Companies Settle “True Lender” Lawsuit With Colorado Attorney General

August 19, 2020
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court rulingAvant, Marlette Funding, and several banks consented to a settlement with the Colorado Attorney General earlier this month to close the books on litigation that has gone on for more than three years.

The lawsuits alleged that Avant and Marlette, who enjoyed bank partnerships, were themselves not covered by federal bank preemption and that they had violated the Uniform Consumer Credit Code of the state by among other things, charging excessive costs to consumers.

After a lengthy battle, Avant, Marlette, WebBank, and Cross River Bank entered into a joint settlement agreement with the Colorado Attorney General that prohibits the fintech companies from charging more than 36% APR in the State of Colorado, along with requiring that the fintech companies maintain a state lending license and engage in a long list of new and redundant measures of compliance.

The full settlement agreement can be viewed here.

The SEC Already Suffered a Major Defeat in the Par Funding Battle – But Who is the Real Loser?

August 8, 2020
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SEC BuildingWhile the news media, regulatory agencies, and law enforcement are high-fiving each other over the course of events in the Par Funding saga (a lawsuit, a receivership, an asset freeze, and an arrest), there lies a major problem: The SEC already suffered a major defeat.

On July 28th, rumors of a vague legal “victory” for Par Funding circulated on the DailyFunder forum. The context of this win was unknowable because the case at issue was still under seal and nobody was supposed to be aware of it.

Cue Bloomberg News…

In December 2018, Bloomberg Businessweek published a scandalous story about a Philadelphia-based company named Par Funding. And then not a whole lot happened… that is until Bloomberg Law and Courthousenews.com published a lengthy SEC lawsuit less than two years later that alleged Par along with several entities and individuals had engaged in the unlawful sale of unregistered securities.

BloombergAt the courthouse in South Florida, those documents were sealed. The public was not supposed to know about them and deBanked could not authenticate the contents of the purported lawsuit through those means. According to The Philadelphia Inquirer, the mixup happened when a court clerk briefly unsealed it “by mistake” thus alerting a suspiciously narrow set of news media to the contents. deBanked was the first to publicly point this out.

In court papers, some of the defendants said that they learned of the lawsuit that had been filed under seal on July 24th from “news reports.” Bloomberg Law published a summary of the lawsuit on its website in the afternoon of July 27th.

“It is fortuitous that the Complaint was initially published before it was sealed,” an attorney representing several of the defendants wrote in its court papers. “Otherwise, [The SEC] would have likely accomplished its stealth imposition of so-called temporary’ relief, that would have led to the unnecessary destruction of a legitimate business.”

FBIThe day after this, on July 28th, a team of FBI agents raided Par Funding’s Philadelphia offices as well as the home of at least one individual. Rumors about the office raid landed on the DailyFunder forum just hours later, along with links to the inadvertently public SEC lawsuit now circulating on the web.

The New York Post caught wind of the story and published a photo of an arrest that had taken place fifteen years ago, creating confusion about what, if anything, was happening. Nobody, was in fact, arrested.

The SEC lawsuit was finally unsealed on July 31st, along with the revelation that Par Funding and other entities had been placed in a limited receivership pursuant to a Court order issued just days earlier. The receivership order was a massive blow to the SEC. It failed to obtain the most important element of its objective, that is to have the court-ordered right to “to manage, control, operate and maintain the Receivership Estates.” The SEC specifically requested this in its motion papers but was denied this demand and others by the judge who leaned in favor of granting the Receiver document and asset preservation powers rather than complete control of the companies.

The language of the Court order was interpreted differently by the Receiver, who immediately fired all of the company’s employees, locked them out of the office, and then suspended all of the company’s operations which even prevented the inbound flow of cash to the company (of which in the matter of days amounted to nearly $7 million). The SEC did successfully secure an asset freeze order.

In court papers, Par Funding’s attorneys wrote that: “The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”

CourtroomThe Receiver, in turn, tried to fire Par Funding’s attorneys from representing Par. Par’s attorneys say that the Receiver has communicated to them that it is his view “that he controls all the companies.”

“The SEC is simply trying to drive counsel out of this case, as an adjunct to all the other draconian relief that they insist must be employed to ‘protect the investors,'” Par’s attorneys told the Court. “Due Process is of no regard to the SEC.”

As lawyers on all sides in this mess assert what is best for “investors,” seemingly lost is the collateral damage that is likely to be thrust on Par’s customers. The Philadelphia Inquirer has repeated the SEC’s contention that Par made loans with up to 400% interest. Bloomberg News has called Par a “lending company” whose alleged top executive is a “cash-advance tycoon.”

A review of some of Par’s contracts, however, indicate that they often entered into “recourse factoring” arrangements. “This is a factoring agreement with Recourse,” is a statement that is displayed prominently on the first page of the sample of contracts obtained by deBanked.

Parallels between the business practices of Par Funding and a former competitor, 1 Global Capital, have been raised at several junctures in the SEC litigation thus far. But some sources told deBanked that in recent times, Par has been offering a unique product, one that is likely to create disastrous ripple effects for hundreds or perhaps thousands of small businesses as a result of the Receiver’s actions (even if well-intentioned).

The “Reverse”

Par offered what’s known as a “Reverse Consolidation,” industry insiders told deBanked. In these instances Par would provide small businesses with weekly injections of capital that were just enough to cover the weekly payments that these small businesses owed to other creditors.

One might understand a consolidation as a circumstance in which a creditor pays off all the outstanding debts of a borrower so that the borrower can focus on a relationship with a single lender. In a “reverse” consolidation, the consolidating lender makes the daily, weekly, or monthly payments to the borrower’s other creditors as they become due rather than all at once. Once the other creditors have been satisfied, the borrower’s only remaining debt (theoretically) is to the consolidating lender.

money bombPar does not appear to have offered loans but sources told deBanked that Par would provide regular weekly capital injections to businesses that could not afford its financial obligations otherwise. Par, in essence, would keep those businesses afloat by making their payments.

That all begs the question, what is going to happen to the numerous businesses when Par breaches its end of the contract by failing to provide the weekly injections?

As the Receiver makes controversial attempts to assert the control it wished it had gotten (but didn’t), the press dazzled the public on Friday with the announcement that an executive at Par Funding had been arrested on something entirely unrelated, an illegal gun possession charge. The FBI discovered the weapons while executing a search warrant on July 28th but waited until August 7th to make the arrest.

It remains to be seen what the 1,200 investors will recover in this case or what will become of the Receiver in the battle for control, but sources tell deBanked that the authorities are all fighting over the wrong thing.

They should all be asking “what’s going to happen to the small businesses when their weekly capital injection doesn’t come in the middle of a pandemic?”

Par Funding Files Strong Response to SEC’s TRO After “Lockout”

August 4, 2020
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United States Securities and Exchange commission SEC logo on entrance of DC building near H streetPar Funding’s attorneys at Fox Rothschild filed a strong response with the Court over the apparent actions taken by the Receiver to lock out its employees and suspend ACH debits, the docket shows.

“On the afternoon of July 28, the SEC advised that Mr. Stumphauzer (the appointed receiver) would cause the immediate dismissal of all the employees of the businesses and that no employees of the business would be permitted to enter the premises – leading to over 100 employees being barred from the business premises for the last week despite the fact that thousands of merchants around the country rely on ongoing communication with CBSG to ensure the ongoing viability of their business operations.”

It continues…

“To date, not a dollar has been taken in by the Receiver to pay investors, and they have not been paid. The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”

You can view the entire argument here.

Par’s attorneys are expected to file a more comprehensive opposition by the end of the week.

deBanked did not reach out to any party for comment given the unlikelihood that any would be shared on pending litigation.

Did Sealed Case Get Leaked on Bloomberg News Site?

August 4, 2020
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BloombergA series of Bloomberg News stories in 2018 appear to have put a handful of companies in the cross-hairs of regulators, recent legal filings indicate, and Bloomberg is enjoying unusual status in the saga.

One example is the copy of a federal lawsuit brought by the SEC that appeared on Bloomberglaw.com on Monday, July 27th. A summary of the lawsuit and the full 58-page complaint were broadcast through the Bloomberg-branded website in Google News and were quickly picked up by industry observers who pointed out that the complaint referenced an ongoing undercover investigation by law enforcement agencies.

It was an unusual reveal.

Except when deBanked tried to authenticate the documents by attempting to retrieve an original copy through the court system, we were unsuccessful because the entire case was sealed.

The case and an identical copy of the complaint, which Bloomberg had been circulating all week, were finally unsealed on Friday, July 31st. The case number was the only thing different.

The odd sequence of events suggests that Bloomberg Law may have inadvertently blown the lid on a case almost a week before anyone was supposed to know about it, including the defendants. Over the weekend, one defendant was upset that he had not been able to access the docket until the evening of July 31st. That was 4 days after the world had already gotten a glimpse of it.

FTC Commissioner Rohit Chopra on Merchant Cash Advances

August 3, 2020
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United States Federal Trade Commission

Following recent lawsuits filed by the FTC, Commissioner Rohit Chopra made the following statements earlier today in an announcement about merchant cash advances:

As the Commission proceeds into litigation in these matters and further studies this market, I hope that we will uncover additional information about business practices in this opaque industry. In particular, we should closely scrutinize the marketing claim that these payday-style products are “flexible,” with payments contingent on the credit card receivables of a small business. In reality, this structure may be a sham, since many of these products require fixed daily payments, and lenders can file “confessions of judgment” upon any slowdown in payments, with no notice or due process for borrowers.

This raises serious questions as to whether these “merchant cash advance” products are actually closed-end installment loans, subject to federal and state protections including anti-discrimination laws, such as the Equal Credit Opportunity Act, and usury caps. The stakes are high for millions of small businesses.

New York State Legislators Resume Push of Commercial Finance Disclosure Bill

July 17, 2020
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A bill (A10118A / S5470B) intended to create uniform disclosures for comparison purposes while also placing control of the commercial finance industry under the purview of the superintendent of the New York Department of Financial Services, is moving forward.

The March 2020 initiative was picked back up this week by members of the Assembly where it passed the banking committee and codes committee on a unanimous and bipartisan basis.

“When enacted, this bill will become the strongest commercial lending disclosure law in the country that covers all commercial financing products,” wrote Ryan Metcalf, Head of US Regulatory Affairs and Social Impact at Funding Circle, on LinkedIn. “It includes strong provisions that ensures enforcement and eliminates loopholes that will prevent gaming & abuse, & requires APR to be disclosed for all products.”

Metcalf further wrote that they and the Responsible Business Lending Coalition (RBLC) have been working diligently with NY state legislators for the last year or so to craft this bill. Among RBLC’s membership is Fundera, Nav, Lendistry, LendingClub and about 4 dozen other companies.

How Should A Merchant Cash Advance Be Structured, What is Syndication, and More?

June 29, 2020
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A recent roundtable hosted by Pepper Hamilton partner Gregory J. Nowak examined some broad questions about merchant cash advances including:

  • What is a merchant cash advance?
  • How should a merchant cash advance transaction be structured?
  • What are the key features for enforceability?
  • Could a merchant cash advance transaction be a security?
  • What is participation? is it a security? If yes, what does that mean?
  • What is syndication?
  • What’s the role of FINRA?

They published the presentation on jdsupra.com and it can be viewed here:

Business Loan Broker “The Tyrant” Pleads Guilty

June 29, 2020
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Suffolk County PoliceThe owner of a Long Island business loan brokerage accused of orchestrating an advance fee loan scheme, pled guilty this month. Demetrios Boudourakis, known in his brief MMA fighting career as The Tyrant, pled guilty to the top charge of grand larceny in the 2nd degree.

Boudourakis was arrested last year after joint law enforcement efforts by the Suffolk and Nassau police and sheriff’s departments, New York State Police, the FBI and the Drug Enforcement Administration, had been monitoring his company’s business for months. According to the Suffolk County District Attorney, the investigation revealed evidence that Boudourakis offered loans to his targets in exchange for advance fees, and then collected the fees without providing the loans. Once he and his employees had received the advance fees, they would cease contact with the victims. The scheme was determined to have generated stolen proceeds in excess of $2 million.

His sentencing date is on September 4th, where he is expected to serve between 5 and 10 years in prison.

Separately, pending federal drug charges against him were recently dropped.

If You Do MCA, You’re Not a Lender (Part Two)

June 16, 2020
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wrongA three-year-old deBanked blog post turned out to be a bit prophetic.

Titled If You Don’t Make Loans, You’re Not a Lender (And definitely not a ‘direct lender’) and posted on January 19, 2017, I hypothesized that the misuse of financial language on the phone or in an e-mail, particularly if one conflated merchant cash advances with lending, could one day result in a subpoena for a deposition to explain it.

In the People of the State of New York, by Office of the New York State Attorney General v. Richmond Capital Group LLC et al, that very scenario played out. Several people were subpoenaed last year and were required to give testimony to lawyers for the New York State Attorney General to explain why internal company communications allegedly referred to MCAs as loans or why a purported MCA company website made use of lending terminology.

The answers, which are public record, were not great. At least two individuals answered that line of questioning by pleading the fifth to potentially avoid self-incrimination.

While there are a lot of colorful details to consider in this case, the AG’s lawsuit dives into the various ways in which the defendants allegedly conflated financial products, including that a defendant company allegedly advertised itself as a “lender” when it actually was not.

While the allegations in the AG’s complaint are probably somewhat unique, there are claims and arguments within them that may be worth further legal review and analysis. Contact an industry-knowledgeable attorney if you have questions.