Legal Briefs

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?”