Judge throws out $87m Yieldstreet claim in fight over Lakhani ship recycling finance

A US federal court judge has thrown out New York-based financial tech venture Yieldstreet’s $87m fraud lawsuit against US and Cyprus-based maritime financial advisors Four Wood Capital.

The summary dismissal by US district judge Paul Gardephe, of the Southern District of New York federal court, turned not on the substance of the dispute, but on whether the court had jurisdiction over the subject matter in the fight.

Yieldstreet blames advisors for massive cash-buyer losses

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For defendants Four Wood Capital Advisors, Four Wood Capital Partners, Steven Baffico and Andrew Simmons, the dismissal means they are off the hook for Yieldstreet’s claims for its losses in financing cash buyer Tahir Lakhani.

A Yieldstreet representative, however, subsequently confirmed that the company plans to carry its battle with Four Wood to New York’s state court.

Simmons heads Cyprus-based Global Marine Transport Capital (GMTC), an entity which was active in the transactions and mentioned by the judge as a Four Wood affiliate but was not a party to the Yieldstreet legal action. Baffico is chief executive of Four Wood.

The Four Wood entities plus New York-based Baffico and Athens-based Simmons have spent nearly three years fighting off Yieldstreet − or waiting to fight, as bottlenecked courts moved slowly during worst of the Covid-19 period.

Baffico, Simmons, and the Four Wood parties advised Yieldstreet in a disastrous series of ship recycling lending investments to the Lakhani-controlled North Star Group, and the lawsuit that was just dismissed is only one strand in a web of legal actions amongst financier Yieldstreet, its investors, its advisors and the cash buyers of ships for demolition.

TradeWinds reported 2020 that Yieldstreet had won a London High Court summary judgment against Tahir Lakhani and sons Ali and Hasan for $76.7m. Another lender, Oaktree Capital Management-backed private equity firm Njord Partners, won a similar judgement for $47.3m against Tahir Lakhani.

Between June 2018 and September 2019, Yieldstreet had made some $89.2m worth of loans to some 15 Lakhani-controlled parties, almost all of which ended up in default thanks to slumping scrap prices. Yieldstreet claimed that the cash buyer parties had engaged in “massive fraud”, juggled assets and deceived the lenders about the location and existence of ships bought for scrapping, using borrowed funds to pay off other lenders. Sfforts to reach Tahir Lakhani for this story were unsuccessful.

As TradeWinds has previously reported, Yieldstreet wanted the court to hold Four Wood, Baffico, and Simmons responsible, because of their “obligation under the investment management agreement to manage, monitor and service the loans and the North Star borrowers’ compliance with their underlying loan agreements”.

Yieldstreet also contended that Four Wood led it astray by engaging London law firm Stephenson Harwood as counsel, when Stephenson Harwood had a long-standing relationship with Lakhani. Thus when it came time to serve notice of default and demand accelerated repayment, the law firm “refused to do so, asserting that they would not take public action adverse or provocative to the Lakhanis because of [an] undisclosed conflict of interest”.

TradeWinds has approached Yieldstreet founder Michael Weisz and Four Wood’s Baffico requesting comment, as well as officials of Stephenson Harwood.

No maritime contract

In a 30-page opinion issued on 30 March, Gardephe did not touch on the merits of those allegations. Instead, he examined the nature of the contract against prevailing case law and ruled that the US federal courts do not have jurisdiction over the dispute because the nature of the investment management contract was not maritime.

“The principal objective of the agreement is investment management and not maritime commerce,” wrote the judge.

Gardephe wrote that Four Woods’ duties of sourcing and managing YieldStreet’s loans, conducting due diligence, negotiating with prospective borrowers, monitoring loan repayments and the underlying security, and calculating and reporting on portfolio performance were investment work, not maritime work. The fact that the borrowers would use the money to buy ships with “does not convert an investment management agreement into a maritime contract”, he said.

Vessel sales contracts are not considered maritime in the sense that would give US federal courts admiralty jurisdiction over them, and contracts ancillary to vessel sales are even less so.

“The investment management agreement is, of course, even more remote from maritime commerce … because it is directed to the financing of loans to third parties so that they may purchase vessels,” Gardephe wrote.

This story has been updated to include later comment by Yieldstreet confirming its intention to resume the lawsuit in another venue.