The investors who entrusted their money to the
But the borrower of the money — a separate group of companies based in the United Arab Emirates — instead absconded with millions. So alleged the Securities and Exchange Commission on Tuesday in a settlement agreement finding the New York-based Yieldstreet had failed to inform investors of the risks they ran by taking part in the deconstruction scheme.
In neither accepting nor denying the charges, Yieldstreet and its investment advisor subsidiary Yield Street Management agreed to pay a $1.9 million penalty. Zoey Gottlieb, a Yieldstreet spokesperson, said the firm brought concerns about the ship-deconstruction investments 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," Gottlieb said in an email.
In its complaint, the SEC alleged that Yieldstreet raised money online for the deconstruction projects through
The last of those six rounds of fundraising saw Yieldstreet bring in $14.5 million from investors. But even before then, according to the SEC, it had good reason to believe that not all was going according to plan.
The firm had received reports that some of the ships that were to be deconstructed with the previous rounds of money it had raised had in fact already been broken up without the repayment of any borrowed money. Yieldstreet also was told that some of the ships could not be located because their onboard tracking systems had ceased functioning.
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The SEC alleged Yieldstreet failed to disclose these findings to its investors.
The firm began making inquiries after it did not receive a loan payment due in October 2019. It subsequently concluded that the ship that was to be deconstructed with the money had already been broken up.
When confronted with these reasons for concern, the borrower claimed insolvency. "As a result, YieldStreet was unable to foreclose on the ship to mitigate investor losses," according to the SEC's complaint.
"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," Osman Nawaz, chief of the SEC's Enforcement Division's complex financial instruments unit, said 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."
Douglas Schulz, a securities lawyer and the president of Invest Securities Consulting, said the case highlights some of the risks of private investments. Investors who were advised to put their money into deconstructing ships would have been hard-pressed to find sources of information they could turn to to read up on the likely pros and cons of these opportunities.
"Private placements are in some ways even higher risk than trading in commodities," Schulz said. "Commodities can be volatile, but they are regulated, and information about them is widespread."
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Yieldstreet ceased offering "marine deconstruction loans" in 2019. In October 2020, Yieldstreet won a judgment before the High Court of England and Wales ordering the owners — Muhammad Tahir Lakhani and his two sons — of a Dubai-based ship recycling company to pony up $77 million that the firm could use to repay loans to investors.
Yieldstreet was founded in 2015 primarily as a way to give investors a way to put money into real estate. It eventually extended its investment opportunities into alternatives like art, private credit and ship deconstruction.
Yieldstreet's investment advisory arm reported having roughly $1.06 billion in assets under management in its latest Form ADV, dated Sept. 6. Of its nearly 100 employees, roughly 40 have advisory functions.
