The recent bankruptcy of Think Finance LLC, which says it is financial technology provider but is accused in multiple federal lawsuits of being a predatory lender, is setting up an open-court clash with a longtime backer, a Chicago hedge fund with ties to former Sen. Joseph Lieberman of Connecticut.
Think Finance said the hedge fund, Victory Park Capital Advisors, cut off its access to cash and forced the Monday bankruptcy filing. Both companies stand accused by Pennsylvania Attorney General Josh Shapiro of profiting from a "rent-a-tribe" scheme that runs investor funds through a web of shell companies to make it appear lawsuit-resistant Native American tribes are making short-term, high-interest loans to distressed consumers online.
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In fact, the attorney general's suit said, both Think Finance and Victory Park are active participants in an arrangement set up to duck state laws that limit interest charges on loans. Both companies, the attorney general contends, rake in profits from an online lending operation that is designed to evade Pennsylvania's limits on the amount of interest that can be charged and other consumer laws.
Think Finance said it isn't a lender but a financial technology provider. Victory Park, in a motion seeking to have the Pennsylvania case thrown out, said it isn't a lender, either. It simply provided money through "commercial transactions" that was used to make the online loans.
Bankruptcy will provide a window into the complex connections between Think Finance and Victory Park, and the network of companies and investment vehicles that connect them and shuttle money in and profits out of the lending operation
A representative of Victory Park declined to comment. Think Finance said the lawsuits seeking to tag it with blame for alleged bad lending practices have no merit. "The reason for the bankruptcy filing is a liquidity crisis caused by certain parties defaulting on their obligations to our company. Victory Park Capital Advisors, LLC and related companies have deprived the company of access to tens of millions of dollars," Think Finance said.
Judge Harlin Hale of the U.S. Bankruptcy Court for the Northern District of Texas scheduled a hearing Friday on Think Finance's bid for an order barring Victory Park from spending the disputed cash.
Online lending is particularly dangerous to the poor, said Jay Speer, executive director of the Virginia Poverty Law Center, an advocacy group that is suing Think Finance over alleged illegal lending.
Unpaid lenders simply drain funds from the bank accounts of borrowers, creating an inescapable "debt trap," Mr. Speer said.
States like Pennsylvania and Virginia have strict regulations on consumer lending. By funneling loans through Indian tribes, critics say, the finance companies attempt to circumvent laws created to protect consumers, including limits on interest rates and licensing requirements. "We tell them you need to stop the company from debiting your account, because these loans are illegal in Virginia," Mr. Speer said. "The company tells them, 'Oh no, your lawyer doesn't know what he's talking about because we are affiliated with an Indian tribe and therefore we don't have to follow your state law.'"
Think Finance and Victory Park denied the allegations they have a hand in such practices but are fighting over the profits from it. Money comes out of the business through various fees and agreements, court papers said. There are participation rights similar to the securitizations that allowed lenders to invest in subprime home loans. According to the Pennsylvania lawsuit, there are also subterfuges such as "Financial U LLC," a company that charges the tribes for educational videos to post on their websites.
The battle will play out in a bankruptcy court in Dallas, where Think Finance filed for protection from creditors Monday, accusing Victory Park of "raiding" bank accounts and driving it to insolvency.
In May, Mr. Lieberman was considered a top candidate to fill the post of FBI director after the job was left vacant after President Donald Trump fired James Comey. Mr. Lieberman said Tuesday he is on the advisory board of Victory Park and in that capacity has no involvement in the daily operations of the firm.
Mr. Lieberman practices law at Kasowitz Benson & Torres, a law firm with longstanding ties to Mr. Trump. He withdrew his name from consideration for the FBI role due to partner Marc Kasowitz's work for Mr. Trump.
Think Finance and Victory Park have been linked together for years in what they say is a venture to invest in loans made by the tribes. Earlier this year, Victory Park began backing away from Think Finance.
According to an affidavit filed by Barney C. Briggs, Think Finance's chief financial officer, by August relations between the two companies had soured to the point that Victory Park moved to take charge of bank accounts at a , that Think Finance counted on for cash. Ultimately, Mr. Briggs said, Victory Park shut off payments while allegedly owing tens of millions of dollars to Think Finance.
The first order of business in bankruptcy, Think Finance said, is to get Victory Park to release its grip on the cash.
In addition to the Pennsylvania Attorney General lawsuit, which began in 2014, a racketeering lawsuit was filed against Think Finance in federal court in Virginia. There's also a Florida putative class action, filed in September. Both lawsuits echo the "rent-a-tribe" allegations and seek to have the consumer loans invalidated.
(END) Dow Jones Newswires
October 24, 2017 18:07 ET (22:07 GMT)