[co-author: Stephanie Kozol]*
New York Attorney General (AG) Letitia James filed a lawsuit on March 5 against Yellowstone Capital, its founder David Glass, and a network of 30 other affiliated companies and individuals. James alleges that Yellowstone Capital, acting through a myriad of different company names, engaged in an orchestrated predatory lending scheme. James’ lawsuit is among a wave of recent enforcement actions targeting alleged deceptive financial practices.
In her lawsuit, James alleges that Yellowstone Capital and its related entities offered high-interest, short-term funding for small businesses provided through merchant cash advances (MCAs) in violation of the law. MCAs are a popular type of funding option among small businesses that are unable to secure traditional small business loans from banking institutions, and offer flexible payment amounts and open-ended terms.
However, according to the allegations, Yellowstone Capital and its related entities collected payments at fixed daily amounts, which were debited directly from the borrower’s bank accounts over short repayment periods, such as 60 or 90 days. The complaint alleges that the defendants, rather than reconciling daily payments to ensure they would not surpass a predetermined percentage of the borrowers’ receipts, essentially disqualified borrowers from payment refunds. They did this by using deceptive tactics when the daily payments surpassed the percentage of receipts. As a result of these practices, James alleges that the MCAs functioned as short-term loans with interest rates as high as 820%. The lawsuit also alleges that Yellowstone Capital manipulated the New York court system by fraudulently obtaining judgments against the borrowers.
James is seeking to recover at least $1.4 billion in interest and restitution, and an injunction, which would require that the companies cease their activities. The lawsuit follows a settlement between the Federal Trade Commission (FTC) and Yellowstone Capital involving similar allegations. The FTC investigation resulted in a July 2022 settlement that required Yellowstone Capital to pay $9.8 million.
Why It Matters
This case serves as a reminder of the regulatory priorities of regulatory bodies like the New York AG’s office to enforce consumer protection laws and protect consumers and businesses from what the regulators perceive as fraudulent practices. Interestingly, before initiating the lawsuit, James secured settlements with five individuals implicated in the Yellowstone Capital operation. These settlements recovered a total of $3.37 million in restitution and prohibited the individuals from participating in the merchant cash advance industry.
Additional articles on State Attorneys General offices in the alleged deceptive practices space:
*Senior Government Relations Manager
