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N.J. Attorney General is the second agency to sue the cash advance firm Yellowstone Capital

The state Attorney General follows a suit filed earlier this year by the Federal Trade Commission against the merchant cash advance firm.

New Jersey Attorney General Gurbir S. Grewal
New Jersey Attorney General Gurbir S. GrewalRead moreNJ Attorney General's Office file

New Jersey’s attorney general on Tuesday filed a lawsuit against Yellowstone Capital and affiliates, alleging that the merchant cash advance company and its subsidiaries took advantage of small-business borrowers in the Garden State.

“We are taking action today to protect our state’s small businesses and small-business owners from predatory practices in the market for merchant cash advances,” Attorney General Gurbir Grewal said in a statement.

“Local businesses are struggling due to the COVID-19 pandemic,” he added. “We will not tolerate – now or ever – efforts to take advantage of them through predatory lending and collection practices.”

The Attorney General’s office sued Yellowstone’s parent Fundry.US; Yellowstone’s subsidiaries High Speed Capital; World Global Capital doing business as YES Funding; HFH Merchant Services; Green Capital Funding; MCA Recovery and Max Recovery Group.

Yellowstone and its affiliates used deceptive advertising to attract small businesses with poor credit, the attorney general said. The company masked its loans as purchases of accounts receivables, enabling it to charge usurious interest rates that “led to the ruin of small businesses and owners across the United States.”

The agency is alleging violations of the state’s Consumer Fraud Act and advertising regulations, and filed the suit in Superior Court of New Jersey’s Chancery division in Hudson County.

A phone call to Yellowstone’s office in Jersey City wasn’t returned, nor were emails to its corporate address.

Merchant cash advance companies lend money based on future sales, but nationally have generated complaints from small-business owners alleging predatory interest rates and abusive collections in an industry that operates without the constraints that apply to other lenders.

The Federal Trade Commission this year also sued Yellowstone and Fundry. The New Jersey Bureau of Securities has taken action against another MCA company — Complete Business Solutions Group, Inc., which does business as Par Funding — for its cash advances through the sale of unregistered securities.

The FTC’s complaint against Yellowstone Capital, Fundry, founder and CEO Yitzhak Stern, and president Jeffrey Reece alleged that they unlawfully withdrew millions of dollars in excess payments from customers’ accounts, and to the extent they provided refunds, sometimes took weeks or even months to provide them.

In some cases, Yellowstone would refund this money only when businesses complained, leaving small businesses without needed cash on hand. The complaint also cites examples of businesses being left with bank overdraft fees due to the unauthorized withdrawals.

“Small businesses are struggling right now and need responsible sources of financing,” Andrew Smith, director of the FTC’s Bureau of Consumer Protection, said in September. “Making sure that lenders and funders don’t deceive business borrowers or engage in servicing abuses is a big priority for the FTC.”

Merchant cash advances in Pa.

Merchant cash advances are a form of financing to a small business in exchange for repayment through daily automatic debits. They’ve drawn scrutiny in the commonwealth and other states as business owners struggle through the pandemic.

In Pennsylvania, federal regulators this past summer charged felon Joseph W. LaForte, 49, and his wife, Lisa McElhone, 41; and Montgomery County financial adviser Perry Abbonizio, 62, among others, with selling unregistered securities tied to LaForte’s business, Par Funding, a merchant cash advance firm based in Center City.

In a civil lawsuit filed in July, the U.S. Securities and Exchange Commission accused McElhone; her husband, LaForte; and financial salesmen in Pennsylvania and Florida of fraud. The agency says Par raised nearly $500 million from hundreds of investors but failed to warn them how risky the investments were before Par cut expected payments to them in April.

The SEC and Par are still litigating the civil suit in federal court. No criminal charges have been filed.