By SJA Jafri + Bureau Report + Agencies
LONDON/ NEW YORK/ KARACHI: Fintech firm Yieldstreet is facing litigation filed by investors who lost more than $100 million in a spectacular series of high-risk defaults and misleadingly marketed alternative investment products just seven years after it was created to take advantage of US Securities and Exchange Commission (SEC) rules relaxing the definition of supposedly sophisticated “accredited investors”.
The lawsuit has been filed by Peiffer Wolf Carr Kane & Conway (Peiffer Wolf) and Sonn Law Group. It is believed that several Pakistani and Indian investors have lost huge amounts of investments and are part of the cases.
The class-action lawsuit, which has been brought by four investors in the US District Court for the Southern District of New York, states: “The end result is that, claims of no principal loss, in-depth ‘diligence’, and reliance on ‘asset class experts’ notwithstanding, Yieldstreet’s products are poorly sourced and structured, with a default rate five times higher than even that of so-called ‘junk bonds’. Yieldstreet’s junk bonds, however, are mass-marketed to the general public and may be purchased within a matter of minutes by anyone with access to a computer who self-certifies that they earn over $200,000 a year.”
The lawsuit focuses on false and misleading statements the fintech firm made to investors to induce them to purchase certain products, including vessel deconstruction funds, oil and gas wells, commercial real estate, and modern art.
The law firm has said that Michael Weisz is the soul and life of Yieldstreet and has been running the operations with total control. Indian origin Milind Mehere is the founder and CEO of Yieldstreet and co-founder of Yodle.
“Simply put, Yieldstreet’s overexposed, concentrated loan model was doomed to fail a ‘sinking ship,’ both literally and figuratively. Duped investors were purchasing Yieldstreet’s vessel deconstruction products at a fever-pace, but none of them knew that the same borrower was on the other end of every deal. Yieldstreet and Weisz were utterly unconcerned with this risk,” said attorney Joseph Peiffer in a statement.
Michael Tecku, a resident of Austin, Texas who lost a substantial amount of money in Yieldstreet said the company gave a beautiful dream, “but the reality” was a “nightmare”.
“These investments were marketed as low risk asset-backed institutional investments run by experts with reasonable returns, but the truth is, there are no experts and there is no institution. It’s just one group of hustlers being out-conned by another,” he said.
Yieldstreet aggressively markets its “innovative products” to the general public through social media and direct email campaigns that drive potential investors to the company’s website.
YieldStreet tried to deflect its investment team’s lack of experience by claiming reliance on “asset class experts” to help originate, structure, and service its deals.
However, the experts’ recommendations and warnings were ignored by Yieldstreet’s President Michael Weisz.
Yieldstreet’s mismanagement came to light in March 2020, when one by one its vessel deconstruction funds started to default. Instead of owning up to its misdeeds, the company instead went on an offensive, accusing the borrower and the expert they consulted to structure the deal of “fraud” and “mismanagement.”
Jeff Sonn, managing partner, Sonn Law Group, said: “As of the end of the first quarter of 2020, nearly one-third of Yieldstreet’s portfolio were in default. At best, this was a case of the ‘blind leading the blind.’ Yieldstreet falsely claimed to have a track record, specialised insights, and a history of success handling tens of millions of dollars of investors who were termed ‘accredited,’ but often not very sophisticated.”
In July 2013 the SEC enacted Rule 506(c) permitting general solicitation of accredited investors. YieldStreet was formed soon thereafter, promising to provide accredited investors with “access to innovative income generating products”.
The law firm Peiffer Wolf Carr Kane & Conway, which maintains offices across the world, has called on the Yieldstreet investors to get in touch to join the lawsuit.