The Securities and Exchange Commission said Tuesday it reached a settlement with digital alternative investments platform YieldStreet of $1.9 million, with the company facing SEC allegations of failing to disclose critical information to investors in a $14.5 million asset-backed securities offering involving a ship that was to be taken apart.
The process of disassembling a ship and then selling parts for scrap or reuse is known as shipbreaking.
“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 enforcement division’s complex financial instruments unit, said in a statement.
Without admitting or denying the SEC’s findings, YieldStreet agreed to the SEC’s order.
The settlement concludes the SEC’s review of the marine borrower fraud Yieldstreet brought to the attention of authorities three years ago, the company said in an email. “All settlement funds will be paid to Yieldstreet investors,” the company added.
According to the Form ADV of YieldStreet’s registered investment advisor, the firm manages $1.2 billion in assets for 184 accounts.
Yieldstreet exposed the marine borrower fraud in 2020 by bringing it to the attention of the authorities in Great Britain.
According to the SEC, in September 2019, YieldStreet offered securities to finance a loan a company affiliate made to a group of companies to transport a retired ship and arrange its deconstruction.
The collateral for the loan was the ship to be broken apart and YieldStreet’s right to the ship was the most important security for the loan and the securities that it sold to investors, according to the SEC.
YieldStreet failed to disclose to investors a heightened risk that it would be unable to seize the ship in the event of a default, according to the SEC.
Prior to the offering, YieldStreet personnel had information showing that ships securing other loans that firm affiliates had made to the same borrowing group were reported as deconstructed without any notice or repayment or could not be located because their tracking systems were off, the SEC alleged.
But YieldStreet proceeded with the 2019 offering without disclosing this material information to investors, and the firm later concluded that the borrowing group caused the ship securing the September 2019 offering to be broken up, according to the SEC.
The borrowers stole the deconstruction proceeds by not repaying the loan from YieldStreet, leaving investors facing millions of dollars of losses, the SEC alleged.