Solid Settles FTV Suit, Buys Back Shares At 56% Discount
Solid Settles FTV Suit, Buys Back Shares At 56% Discount
SoLo Funds Outage Continues, FDIC Files Amicus In Colorado DIDMCA Case, Fintech M&A Accelerates
Hey all, Jason here.
Yesterday was King’s Day here in the Netherlands, a celebration of King Willem-Alexander’s birthday — though I can’t say I really did anything to celebrate this year.
Card expert and author of CardsFTW newsletter Matthew Goldman has just dropped a 35 page research report on debit card program management platforms, which you can check out here, if you’re so inclined.
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Solid Settles FTV Suit, Buys Back Shares At 56% Discount
Solid and its lead Series B investor, private equity firm FTV, have settled their ongoing dispute.
FTV alleged that Solid had fraudulently inflated its revenue figures and sought to recoup its $61 million investment in the company.
Solid and its cofounders Arjun Thyagarajan and Raghav Lal filed a countersuit, arguing that FTV and its board representative, Robert Anderson, had conducted extensive due diligence prior to investing and were aware that Solid had an elevated rate of customer churn and receivables that were unlikely to ever be collected, as demonstrated by the fact that FTV used that information to negotiate a lower per share price of $2.40 for its investment — 20% lower than had been agreed to in an initial term sheet.
Solid and its cofounders’ countersuit describes FTV as an “aggressive private equity firm” with, essentially, buyer’s remorse — that FTV changed its mind when the fintech market cooled and resorted to “made-up claims of fraud, threats, and strong-armed tactics to try to get its money back.”
The countersuit argues FTV’s board representative Anderson breached his fiduciary duty to Solid and its shareholders, that FTV aided and abetted that breach, and that FTV and Anderson engaged in tortious interference with a contract by interfering with Solid’s relationships with its partner banks.
FTV and Anderson sought dismissal of Solid and its cofounders’ counterclaims, but were successful only at winning dismissal of the tortious interference claim.
But FTV’s case against Solid and Solid’s counterclaims won’t see the inside of a courtroom, as the parties reached a settlement earlier this month.
To resolve the matter, Solid has agreed to buy back FTV’s stake — at a substantial discount, as mentioned in This Week In Fintech’s newsletter last Friday.
During the Series B round, FTV bought 20,090,001 shares from Solid for $48,216,002.40, 1,883,333 shares from Solid cofounder and CEO Thyagarajan for $4,519,999.20, and 3,443,333 shares via additional secondary sales, for a total of 25,416,667 shares at a price per share of $2.40.
Solid has repurchased all of FTV’s stake for about $1.04 per share — a discount of more than 56%.
As part of the settlement, Solid, FTV, Solid’s cofounders, FTV’s Anderson, and Solid’s former head of finance fully, finally, and forever release and discharge any known or unknown future claims against each other.
As part of the agreement, FTV’s Anderson agreed to resign from his board position, and another FTV employee, Gary Weber, agreed to resign from his board observer role.
There is an unusual element to the settlement agreement: Solid and FTV agreed to cover up to $300,000 of legal expenses for Solid’s former head of finance, should he need to engage independent legal counsel related to the settlement, his interactions with FTV, his employment at Solid, “and any related government investigation(s).”
Several legal experts Fintech Business Weekly spoke to said that such a provision in a settlement agreement was “highly unusual.” It couldn’t immediately be discerned if Solid is currently under government investigation.
Given the nature of the dispute between FTV and Solid, an SEC investigation for securities fraud wouldn’t be surprising, though Solid has links to other ongoing cases, including a civil suit related to an alleged $9 million scam perpetrated by one-time Solid client EZBanc and a $5 million crypto “pig butchering” scam.
A representative for FTV and Robert Anderson didn’t respond to a request for comment.
A representative for Solid declined to comment on the litigation and said, “We are focused on what's ahead — doubling down on our payments and card issuance infrastructure. Investing in technology and compliance around real-time payments, instant payouts, and innovative card products is our priority going forward.”
Have a tip about Solid or what’s happening in the BaaS space? Reach me on secure messaging app Signal at: +1-316-512-1571
SoLo Funds Outage Stretches Into Second Week, With Many Users Still Unable To Access Funds
Unlicensed P2P payday lending platform SoLo Funds saw its outage continue into its second week, though, the company said, the small-dollar lending service should now be “fully operational for a segment of [its] users.”
The outage appears to stem from a botched transition from working with Evolve Bank & Trust via Synapse to Bangor Savings Bank via Treasury Prime.
Late Friday, the company sent users an update, clarifying that users with outstanding loans would continue to be unable to make manual payments, but that pre-scheduled automatic debits would occur as scheduled.
SoLo Funds warned users against initiating disputes with their bank for debits to their accounts, writing (emphasis added), “Please do not issue chargebacks, as our payment processor may view this as fraudulent activity, which could lead to a ban by their system and would no longer allow us to serve you moving forward. To avoid doubt, the Company will provide documentation of the approved transaction to the bank to dispute any chargebacks filed by any community member.”
The company sought to apologize for the nearly two week long and counting outage, writing in part:
“We understand the transition has not been without challenges, and we want to express our sincere apologies for any inconvenience you may have endured. Our team evaluates every facet of these transactional issues, ensuring any undue fees or discrepancies are swiftly addressed. The company will waive any fees assessed due to system issues, and Borrowers will never be held responsible for any funded loans that were not received.”
But users still unable to access their accounts as of early Saturday morning were not impressed, taking to Twitter and SoLo Funds’ Facebook page to criticize the company’s handling of the situation:
SoLo Funds, and, potentially, its bank partners could face a variety of regulatory issues from the outage, though the complex technical structure and operating model make it difficult to assess who’s at risk of what.
SoLo Funds functionally acts as a loan broker, credit reporting agency, and loan servicer/debt collector; individual “lenders” on the platform fund borrowers’ loans; lender and borrower funds pass through SoLo’s “wallet,” which appears to be powered by accounts at Evolve or Bangor Savings Bank, though lenders and borrowers can normally withdraw these funds to external bank accounts.
UniRush and Mastercard’s outage nearly 10 years ago is somewhat instructive of the risks SoLo Funds and its partner banks may face.
The incident, also the result of a botched technical transition, saw 1,100 users wrongfully suspended, delayed deposits for 45,000 users, users receive inaccurate information about their accounts, and users unable to receive critical information about their accounts due to UniRush’s inadequate customer service.
The CFPB’s consent order in the UniRush and Mastercard case turned primarily on violations of UDAAP, including that Mastercard and UniRush’s inadequate testing prior to the technical transition constituted “unfair” acts or practices and that how UniRush administered accounts after the botched transition was “unfair.”
UniRush and Mastercard were ultimately ordered to pay about $10 million in restitution to impacted users and a $3 million civil monetary penalty.
SoLo Funds’ outage and the impact on its users bears some resemblance to the UniRush/Mastercard case, but it is actually more complicated, and thus poses greater risk to SoLo Funds and its partners, as it involves credit products as well as deposit accounts.
In addition to UDAAP claims SoLo Funds and its partners may be exposed to, the company also appears to have failed to notify impacted users in advance of the transition from Synapse/Evolve to Treasury Prime/Bangor Savings, which could violate disclosure requirements under the Truth In Savings Act/Reg DD; SoLo Funds appears to have debited users’ external accounts for loan repayments even when they sought to stop such payments, in possible violation of the Electronic Funds Transfer Act/Reg E and/or Dodd-Frank’s prohibition on UDAAP; how SoLo Funds handles any erroneous negative impact to users’ “SoLo Score” and maximum borrowing amount could pose risks under the Fair Credit Reporting Act/Reg V; and how SoLo Funds has handled servicing and collecting on loans on behalf of its third-party lenders during the disruption could pose risks under the Fair Debt Collection Practices Act/Reg F.
Representatives for SoLo Funds, Treasury Prime, and Bangor Savings Bank did not respond to requests for comment about the ongoing outage.
FDIC Files Unusual Amicus Brief Supporting Colorado’s Attempt To Block Some Out-of-State Lenders
The FDIC is wading into a lawsuit between three trade groups and the state of Colorado over whether or not out-of-state state-chartered banks can lend to Colorado residents at rates that exceed Colorado’s usury cap.
The case turns on the question of in what state a loan is “made” when a borrower resides in Colorado but the bank is located in another state.
The trade groups’ case argues that a loan is only “made in” a state other than where the bank is chartered (emphasis added) “when all the key functions associated with originating the loan— including the bank’s decision to lend, communication of the loan approval decision, and disbursal of loan proceeds—occur in that other state.”
The groups argue that Colorado’s attempt to block out-of-state state-chartered banks violate the Supremacy and Commerce Clauses of the US Constitution.
In its proposed amicus brief, the FDIC argues that the trade groups misinterpret or misapply prior FDIC opinion letters and federal statutory provisions falling within the FDIC’s administrative charge.
Specifically, the FDIC argues that the trade groups incorrectly conflate assessing where a bank is “located” with where a loan is “made.”
Instead, the FDIC says, for the purposes of Section 525 of the DIDMCA, which Colorado has exercised its rights under to opt out of Section 521, a loan is “made in” a given state, in this case, Colorado, if either the lender (the bank) or the borrower enters into the transaction in that state.
Thus, if a borrower physically resides in Colorado when they enter into a loan agreement, said loan would be considered to be “made” in Colorado, the FDIC’s brief argues.
While it may seem like an esoteric issue, should Colorado prevail in this case, it would disadvantage state-chartered banks vs. their nationally-chartered peers — including and especially for fintechs that partner with state-chartered banks to operate lending programs.
Even if Colorado doesn’t win, that the FDIC made the unusual decision to file an amicus brief supporting the state’s position on blocking out-of-state state-chartered banks from lending into the state at rates that exceed Colorado’s usury cap should be read as a warning for fintechs and banks engaging in such practices.
FT Partners: Fintech M&A On The Rise
FT Partners is out with its Q1 Fintech Insights report, and, in addition to the typical funding numbers, the report takes a look at global merger and acquisition activity in fintech.
M&A is up, with activity in Q1’24 more than doubling from Q4’23 to some $75 billion — perhaps unsurprising, given the still-challenging fundraising environment, especially for companies that haven’t been able to demonstrate viable paths to profitability.
Other Good Reads
Regulators Seize Troubled Philadelphia Bank, Republic First (Wall Street Journal)
The CFPB’s Vision For A Data Economy (Fintech Takes)
Synapse Is Bankrupt (Fintech Brainfood)
Money2020 Asia Recap (Fintech Compliance Chronicles)
Why Have Uninsured Depositors Become De Facto Insured? (NYU School of Law)
How to Prepare for Fedwire’s Big Payments Update (FinXTech)
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