The New Jersey attorney general on Tuesday filed a lawsuit against Yellowstone Capital and its affiliates, alleging that the merchant cash advance company and its affiliates took advantage of small business borrowers in the Garden State.
“We are taking action today to protect our state’s small businesses and small business owners from predatory practices in the merchant cash advance market,” Attorney General Gurbir Grewal said in a statement.
“Local businesses are struggling due to the COVID-19 pandemic,” he added. “We will not – now or ever – tolerate efforts to profit from this through predatory lending and collection practices.”
The attorney general’s office sued Fundry.US, Yellowstone’s parent company; Yellowstone subsidiaries, High Speed Capital; World Global Capital doing business as YES Funding; HFH Merchant Services; Green capital financing; MCA Recovery and Max Recovery Group.
Yellowstone and its affiliates used deceptive advertisements to attract small businesses with poor credit, the attorney general said. The company masked its loans as purchases of accounts receivable, which allowed it to charge usurious interest rates that “have led to the ruin of small businesses and homeowners across the United States.”
The agency alleges violations of state consumer fraud law and advertising regulations, and filed the complaint in the Superior Court of the Chancery Division of New Jersey in Hudson County.
A phone call to the Yellowstone office in Jersey City was not returned, nor were emails to his business address.
Merchant cash advance companies lend money based on future sales, but nationwide small business owners have filed lawsuits alleging predatory interest rates and abusive collections in an industry that operates without the constraints that apply to other lenders.
The Federal Trade Commission this year also prosecuted Yellowstone and Fundry. The New Jersey Securities Bureau took action against another company MCA – Complete Business Solutions Group, Inc., which does business as Par Funding – for its cash advances through the sale of unregistered securities.
The FTC complaint against Yellowstone Capital, Fundry, Founder and CEO Yitzhak Stern, and Chairman Jeffrey Reece alleged that they illegally withdrew millions of dollars in overpayments from customer accounts and, to the extent they refunded, put sometimes weeks or even months to provide them.
In some cases, Yellowstone only refunded that money when businesses complained, leaving small businesses without needed cash. The complaint also cites examples of companies that end up with bank overdraft fees due to unauthorized withdrawals.
“Small businesses are struggling right now and need responsible sources of funding,” Andrew Smith, director of the FTC’s Consumer Protection Bureau, said in September. “Ensuring that lenders and funders don’t mislead commercial borrowers or engage in abuse of service is a high priority for the FTC.”
Merchant cash advances are a form of financing a small business in exchange for reimbursement through daily direct debits. They have caught the attention of the Commonwealth and other states as business owners battle the pandemic.
In Pennsylvania, federal regulators last summer indicted felon Joseph W. LaForte, 49, and his wife, Lisa McElhone, 41; and Montgomery County financial adviser Perry Abbonizio, 62, among others, with the sale of unregistered securities tied to LaForte’s business, Par Funding, a Center City-based cash advance company.
In a civil suit filed in July, the U.S. Securities and Exchange Commission charged McElhone; her husband, LaForte; and financial sellers in Pennsylvania and Florida of fraud. The agency says Par raised nearly $500 million from hundreds of investors, but did not warn them of the risk the investments posed before Par reduced their expected payments in April.
The SEC and Par are still arguing the civil suit in federal court. No criminal charges have been filed.