The fallout from the 2019 collapse of cash buyer Tahir Lakhani’s ship scrapping outfit North Star Group continues, with a settlement agreement between US financial authorities and Michael Weisz’s YieldStreet for “failing to disclose critical information to investors in a $14.5m asset-backed securities offering”.
YieldStreet and affiliated YieldStreet Management admitted no wrongdoing under the deal.
“[The companies]consented to the entry of an SEC order finding that they violated certain antifraud and other provisions of the federal securities laws”, the US Securities & Exchange Commission (SEC) wrote in an announcement.
“The SEC’s order requires YieldStreet to cease and desist from these violations and to pay more than $1.9m in penalties, disgorgement, and interest.”
The $14.5m worth of financings on which the SEC order and the penalties are based are only one slice of the YieldStreet involvement with Lakhani, but the enforcement agency has apparently limited its action to that piece of the business.
The SEC in its announcement highlighted the alternative finance platform’s responsibility to inform its investors about risk.
“YieldStreet aims to unlock the complex alternative investments market for retail investors but failed to disclose glaring red flags it had about the security of the collateral backing this offering,” said Osman Nawaz, chief of the SEC enforcement division’s Complex Financial Instruments Unit, in a statement.
“As this case shows, we are committed to ensuring that investors in any asset class, including ‘alternative’ asset classes, receive complete and accurate disclosures about those investments.”
One key disclosure would have been that of the risk that lender YieldStreet, with its loan secured by a ship to be scrapped, would not be able to seize the ship if the loan went bad. The SEC focussed on that risk.
The SEC, which uses the term “deconstruction” to refer to ship demolition and recycling, found that YieldStreet personnel already had information showing that ships in the hands of client North Star “were reported as deconstructed without any notice or repayment or could not be located because their tracking systems were off” but went ahead with the offering without disclosing this material information to investors.
YieldStreet ultimately concluded, according to the SEC finding and order, that the borrowers “caused the ship securing the September 2019 offering to be deconstructed, but it stole the deconstruction proceeds by not repaying the loan from YieldStreet, leaving investors facing millions of dollars of losses”.
YieldStreet acknowledged its settlement with the SEC but underscored the deception to which they themselves had been subjected.
In a statement to TradeWinds provided through a representative, the company said: “We have reached an agreement with the SEC that concludes its review of the marine borrower fraud Yieldstreet brought to the attention of authorities three years ago.
“All settlement funds will be paid to Yieldstreet investors, and we continue to aggressively pursue recovery for our investors through ongoing litigation and collection efforts both here and abroad.”
The background is a disastrous series of ship scrapping transactions that were financed by non-shipping investors through the YieldStreet online finance platform, rather than through traditional shipping lenders.
As TradeWinds reported extensively at the time, YieldStreet made some $89.2m worth of loans between June 2018 and September 2019 to affiliates of the Lakhani-controlled North Star.
The financings were done against the background of a volatile market for steel, and substantially all ended up in default. YieldStreet has not offered any ship demolition business since the North Star debacle.
TradeWinds reported 2020 that YieldStreet had won a London High Court summary judgment against Tahir Lakhani and sons Ali and Hasan for $76.7m. In parallel with the YieldStreet transactions, another lender, Oaktree Capital Management-backed private equity firm Njord Partners, won a similar judgement for $47.3m against Tahir Lakhani.
However, collection efforts and other legal action remain ongoing, not just against the cash buyers but among financier Yieldstreet, its individual investors, and its advisors.
These include claims of fraud by the cash buyers, but also conflicting claims from YieldStreet and its former advisors Four Wood Capital and affiliated Global Marine Transport Capital over who was responsible for failing to oversee the cash buyers, and over the controversial decision of YieldStreet not to use “revolver” financing in the deals.
A source close to YieldStreet, who was unwilling to speak on record, underscored that the SEC had limited its enforcement to a single investment in the series, and that the SEC had not alleged that Yieldstreet set out to mislead anyone.
Tahir Lakhani has also been contacted for comment.
