Two U.S. agencies are examining investments sold by
YieldStreet Inc., an online platform that pitches itself as giving people the
chance to get in on deals usually reserved for the largest investors.
The Securities and Exchange Commission is investigating YieldStreet
and collecting information on some of the firm’s business dealings, people
familiar with the matter said.
The Federal Bureau of Investigation has been seeking
information on some of YieldStreet’s practices and interactions with customers,
including how the firm marketed certain deals, said an investor interviewed by
the FBI in recent months.
“We do not believe that we are the target of any
investigation,” YieldStreet said in a written statement. The company said it
notified authorities in different countries about what it believes to be a
fraud scheme that YieldStreet was ensnared in.
Launched in 2015, YieldStreet sells investments in loans
backed by everything from ships to artwork to legal settlements. Its customers
buy into investment notes designed to deliver cash payments—in some cases
targeting as much as double-digit yields—tied to those underlying loans.
Individuals poured more than $1 billion into investments through YieldStreet.
The SEC and FBI, some of the people said, are looking into
circumstances around some $90 million in notes YieldStreet sold that were
linked to loans for ship-breaking. That is the labor-intensive and hazardous
business of extracting scrap metal from older vessels. YieldStreet packaged
those loans into notes, and sold a series of those notes starting in 2018.
In March, YieldStreet told investors that roughly a dozen
ships that were collateral for the underlying loans disappeared across
international waters. Investors in those notes haven’t received payments in the
amounts or time frames projected by YieldStreet.
The inquiries may not produce formal allegations of
wrongdoing against YieldStreet.
A spokeswoman for the SEC didn’t respond to a request for
comment. An FBI spokeswoman declined to comment.
One of the investors affected is Cliff Peek of Sarasota,
Fla.
The 58-year-old said he built a portfolio that allowed him
to retire at 50, achieving the kind of financial independence that many
YieldStreet investors hold up as a goal. Investments with YieldStreet put a
share of his life savings in jeopardy.
Seeking uncorrelated returns to stocks, the former marketing
and real-estate executive said he went from making smaller investments in YieldStreet
to up-to-$50,000 lots as he got more comfortable with the firm. He and his wife
hold multiple notes backed by ship-breaking loans now in default, Mr. Peek
said.
“We believed we were getting diversification by spreading
our investment across different loans,” said Mr. Peek. “What was not disclosed
to us was they went to the same borrower.”
A spokesman for YieldStreet said it never identifies
borrowers by name to investors. The firm is pursuing insurance claims and legal
proceedings against entities tied to a shipping family to recover investor
money from the shipping investments.
Mr. Peek said the FBI interviewed him about his experiences
with YieldStreet.
YieldStreet is one of a variety of financial startups that
have given people unprecedented access to alternatives to stocks and bonds in
recent years. This democratization also brings new risks to savers and
retirees.
YieldStreet is led by Michael Weisz and Milind Mehere,
advocates for making alternative investments available to more people.
YieldStreet and other crowdfunding sites have taken a growing share of money
from investors and retirement savers that would traditionally go into stocks or
index funds. Looser regulations for marketing investments online and investors’
search for returns in a low-interest-rate era helped fuel their popularity.
Crowdfunding sites amassed at least $250 billion for
real-estate and private-equity deals by this year, according to an estimate
from Ian Ippolito, founder of trade publication the Real Estate Crowdfunding
Review.
YieldStreet customers are accredited investors, which
include people with more than $1 million in net worth or who make over $200,000
in a year. The firm used digital nudges in an attempt to hook repeat customers,
including email reminders with animated timers that counted down the seconds
before offerings opened up. Buyers were sometimes given a few days to think
over potential investments, and the firm’s most popular deals sold out in just
seconds.
As the pandemic upends the global economy, some of these
alternative investments are souring. Unlike stocks and bonds that are traded on
exchanges, the investments are typically more opaque and lock up investor money
for years.
“We want the same thing our investors do: to get the money
back because our people including founders, the management team, board members,
friends and family are also invested in these deals,” according to a firm
statement in response to questions from The Wall Street Journal.
Recently, YieldStreet disclosed that 14.7% of the money investors
plowed into the firm involved loans that wound up in default as of March.
YieldStreet said its ability to pay investors relies on the borrowers behind
the loans, and YieldStreet doesn’t promise payments if the borrowers don’t pay.
In recent months, YieldStreet investors have built a support
network, sharing stories about the firm in online channels and their work as
amateur sleuths tracing the flow of their money. In April, dozens sent a letter
to YieldStreet executives questioning the quality of the firm’s due diligence
and seeking a fuller accounting of their investments.
According to court documents, the maritime loan money went
to companies tied to the Lakhani family, which built a niche in the
vessel-deconstruction industry. YieldStreet has been seeking to keep a freeze
on assets linked to entities and members of the Lakhani family, alleging they
fraudulently sold vessels, additional court documents show. YieldStreet has
been in legal proceedings to seize another vessel in Malaysian waters.
“We strongly deny any allegations of fraud,” said Muhammad
Ali Lakhani, a family member, reiterating an earlier statement to the Journal.
The statement said, “We have worked hard over 37 years to build a family
business and have a good reputation which is being tarnished by these
allegations and stories.”
YieldStreet has also sued Four Wood Capital Advisors, the
firm that originated the loans, alleging breach of contract and duty in not
monitoring the vessels.
“Four Wood has asked the court to dismiss the complaint,”
said Fred Isquith, an attorney for Four Wood. “We’re optimistic the court will
do so.”
Write to Dawn Lim at dawn.lim@wsj.com
and Dave Michaels at dave.michaels@wsj.com.
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