Legal Briefs
1 Global Capital Charged With Fraud by SEC
August 29, 2018
The Securities & Exchange Commission unsealed a 10-count complaint against 1 Global Capital LLC (“1st Global Capital”), its owner Carl Ruderman, and related parties on Wednesday.
The South Florida firm “fraudulently raised more than $287 million from more than 3,400 investors to fund its business offering short-term financing to small and medium-size businesses,” the complaint begins.
Investors were offered low-risk, high-return investments that 1st Global would use to fund merchant cash advance deals. Ruderman, who owned the company through a trust, misappropriated $35 million of the funds, paying a lot of it to himself and companies he controlled that had nothing to do with MCA, the SEC alleges. Beyond that, millions more went towards other pet projects like a $50 million purchase of distressed credit card debt.
But the deception went deep, the complaint lays out. 1st Global touted a default rate of only 4% despite the fact that 15-18% of their deals over the last 2 years had resulted in collections lawsuits.
By October 2017, the statements investors received showing their monthly performance were faked with the value and performance significantly inflated. By June 2018, one line item on monthly statements (labeled “cash not deployed”) reported that investors collectively had $70 million in idle cash ready to be put into deals. Meanwhile, the company itself only had about $20 million in all of its bank accounts combined, money that was being used for everything including operating expenses, salaries, and commissions.
1st Global’s alleged auditor, Daszkal Bolton, LLP, says they never audited 1st Global’s statements and haven’t had anything to do with the company since 2016. Nonetheless, 1st Global placed Daszkal Bolton’s name on statements given to investors and stated on their website that investor balances were validated by an accounting firm quarterly.
MCA Companies Have Won a “Sh*t Ton” of Cases, Judge Declares
August 27, 2018
A judge in Buffalo, New York has finally had enough with merchants trying to claim that merchant cash advances are loans.
At issue were defendants who sought to overturn a confession of judgment filed by SOS Capital. The Honorable Catherine Nugent Panepinto, who presided over the case, didn’t like that one bit, but what was more offensive to her was the manner in which the defendants tried to overturn it.
With a shit ton of case law already weighing against the defendants for filing an improper motion, Judge Nugent Panepinto went a step further by reminding the defendants that there is no merit to the argument that the subject merchant agreement was a loan.
The defendants, who seemed completely doomed to pay SOS Capital’s attorney fees, were saved only by the charm of their affable Long Island attorney.
This case was decided in Erie County, NY under Index #803512/2018.
Two Commercial Finance Consultants Charged By SEC in Ponzi Scheme
August 22, 2018Two commercial finance consultants were charged by the SEC earlier this week for their alleged role in soliciting investors to place their savings into mortgage-backed securities issued by Woodbridge Group of Companies, LLC, a company revealed to be a $1.2 billion ponzi scheme.
Barry Kornfeld and Ferne Kornfeld of Parkland, Florida, allegedly earned $3.7 million in commissions by selling unregistered securities to more than 500 investors. Barry Kornfeld was already barred by the SEC for previous securities violations, the complaint states. The Kornfelds taught a “conservative retirement, income planning and social security” class at Florida Atlantic University, where the investments were pitched, the SEC says.
FEK Enterprises, Inc. DBA First Financial Tax Group, the company the Kornfeld’s operated, is also named in the complaint.
Their LinkedIn profiles, however, currently list them as the owners of Value Capital Funding, a small business financing broker in Boca Raton, FL.
Merchant Cash Advance Company Wins in Bankruptcy Court After Judge Rules It’s an Ordinary Part of Business
August 21, 2018
Last week, a bankruptcy judge in the Northern District of Illinois ruled that a merchant had used so many merchant cash advances that it had become a normal part of their business.
At issue was Network Salon Services, a business founded in 2004 that was brought back from the brink of insolvency in January 2013 by a merchant cash advance. That advance, coupled with dozens of advances from more than 14 MCA companies over the following 3 and a half years would keep Network Salon on life support until it finally failed for good.
At the end, Network Salon had just $200 to its name and nearly $4 million in outstanding future receivables due to MCA companies.
After the Chapter 7 proceedings commenced, the bankruptcy trustee came knocking on the doors of several MCA companies to give back the funds it believed had been fraudulently transferred and obtained through criminally usurious means.
One of those companies, NY-based LG Funding, pushed back hard, and on August 15th the judge ruled in LG’s favor. In a carefully considered decision, The Honorable Jacqueline Cox said that an exception applied to LG Funding. Unlike a normal creditor where certain property obtained leading up to a bankruptcy becomes returnable to the trustee, Network Salon relied on MCAs in its normal course of business for years and thus the transfers of funds to LG Funding was the ordinary course of business not subject to return.
So ordinary was it in fact that Network Salon used MCAs to make payments on other MCAs, going so far that at one point one of its bank accounts showed no deposit activity for a month except for deposits from MCA companies and online lenders.
Ultimately it didn’t matter if LG Funding was actually debiting the deposits made by rival companies rather than the actual proceeds of sales, Judge Cox opined, because this deviation from the contract was not fraudulent and both parties benefited from it.
The usury arguments, as usual, failed, because New York courts (The state governing LG Funding’s contracts) have already determined that MCA transactions are not loans and therefore can’t be usurious.
“The Trustee has failed to meet her burden to establish by a preponderance of the evidence that the transfers were preferential or constructively fraudulent and therefore subject to avoidance,” The judge ordered. “LG Funding has succeeded in establishing that the transfers were made in the ordinary course of business, defeating the Trustee’s 547(b) preference claim. The constructive fraudulent conveyance claim fails because Network Salon received reasonably equivalent value in the transactions in issue. Judgment will be entered in favor of Defendant LG Funding on all counts.”
This post is an oversimplified explanation. Download the 24-page decision HERE for the full facts and details.
World Global Financing Bankruptcy Converted to Chapter 7
August 9, 2018Florida-based World Global Financing (WGF), who filed for Chapter 11 in May, has been ordered into liquidation following their failure to abide by the settlement agreement with Eaglewood SPV I LP.
Eaglewood’s claim on WGF comprised 98% of all creditor claims.
WGF agreed to settle with Eaglewood for $2.95 million, but WGF failed to make payments in the specified timeframe. That inevitably allowed Eaglewood to convert the bankruptcy to Chapter 7 and to simultaneously file a $6.5 million Confession of Judgment against WGF.
Details Emerge in Florida Lawsuit Against Corporate Debt Advisors
August 9, 2018
A debt settlement company being sued by Itria Ventures in Miami-Dade County, FL was asked to prove its claim that it has managed over $1.5 billion in total debt, court records show. That company, Corporate Debt Advisors (CDA), advertises that it provides debt relief for small business owners.
CDA responded to Itria’s request on June 29th with information relating to just two employees, Tony Shea and John Philbin, who combined through their previous experience have purportedly managed $1,584,000,000 of debt.
Not mentioned in their response is that each individual is prohibited from engaging in debt settlement services with Florida consumers where Corporate Debt Advisors is located.
According to the Office of the Attorney General, both Shea and Philbin previously and independently settled with the State after being investigated for running questionable debt settlement businesses. (See here and here)
In the lawsuit filed against CDA by Itria, it’s alleged that CDA is advising merchants to commit fraud by moving money owed to Itria to a new secret hidden bank account at a local bank in Florida where it will be out of reach from Itria.
This is not the first time Corporate Debt Advisors has been sued. In early July, a competitor to Itria, High Speed Capital, petitioned a New York court to turn over funds it believes CDA has in its possession for unlawful budget planning services rendered to a Florida-based business.
Notorious Tampa Bay Loan Broker Likely Headed Back to Jail
July 27, 2018
Tampa Bay loan broker Victor Clavizzao pleaded guilty this week to one count of wire fraud, which could land him in prison for up to 20 years. This would not be his first time behind bars. In 2009, a federal judge sentenced him to five years for conspiring to fraudulently obtain nearly $6 million in mortgage loans.
This time, Clavizzao, 55, cheated a church congregation out of $16,350 that they had set aside to build a new church. According to a Tampa Bay Times story, shortly after leaving prison in 2014, Clavizzao was still on probation when he created Key Business Loans. Around the same time, he met husband and wife, Sam and Minnie Wright. Minnie Wright is the pastor of the Tampa Bay-area New Testament Outreach Holiness Church #2, and she asked Clavizzao if his company would be able to make a loan to their church.
According to the Tampa Bay Times story, Clavizzao said “Absolutely.”
Clavizzao, who used the named Victor Thomas, ingratiated himself with the Wrights and other church congregants and told them that not only could he help them obtain a $650,000 loan, he could also handle the purchase of the plot of land along with other details. The church gave Clavizzao a series of initial payments – for an architect and for an environment inspection of the land – and when the Wrights started getting suspicious, Clavizzao disappeared.
Last year, suspected of defrauding the Wrights and others, Clavizzao told Tampa Bay Times in a phone interview that his business, Key Business Loans, was completely legitimate.
“Knock yourself out, I’m not doing anything wrong,” he said, acknowledging that he discloses his criminal history to prospective borrowers. “Any person who has a problem about my past can choose to do business with me or not do business.”
In July of 2014, Clavizzao presented the Wrights with a “Proposal Letter for Guaranteed Business Purchase Loan” from Key Capital Commercial Funding, a New York City-based company he said he had ties with. The proposal outlined the terms of a 15-year, $650,000 loan at 5.1 percent interest. The Wrights signed it. However, what the Wrights did not know at the time was that there was no Key Capital Commercial Funding in New York City, or anywhere else.
In part because of persistent reporting on Clavizzao from Susan Taylor Martin at Tampa Bay Times, the Wrights were able to learn more about Clavizzao’s criminal past and the FBI got involved.
After Clavizzao’s recent guilty plea, he is currently out on bond pending his sentencing. A date has not been set.
JTT Funding STILL Impersonating Rival Funding Company, Court Docs Allege
July 26, 2018
A Court-ordered injunction hasn’t prevented New York ISO JTT Funding from continuing to pretend to be Accel Capital, a new motion filed in New York County this week argues. In May, JTT Funding failed to appear in court to defend itself against claims it was impersonating Accel Capital when contracting with merchants. After reviewing the evidence, the judge ordered JTT to stop using the name, logo and likeness of Accel.
Allegedly, JTT is undeterred and is continuing to represent itself as Accel Capital. When merchants deceived by the imposter accidentally reach out to the real company, they learn they’ve been duped. Accel attached contracts as evidence between merchants and the imposter that are dated after the injunction was issued, the docket shows. The phone # in the phony contracts belongs to JTT Funding, according to a Google search.
One of those contracts promises a merchant that they have been approved for $818,000 and in order to obtain the funding they need to first send a payment of $36,932.70 to the imposter.
JTT Funding is the same company that was alleged to have forged a Confession of Judgment last year. Like in the Accel case, JTT never appeared to defend itself.
The Accel Capital suit can be found in the New York Supreme Court under Index Number: 153447/2018
