Yieldstreet, Investors Settle $6.2m Sunken Ship Scrap Dispute

Yieldstreet, Investors Settle $6.2m Sunken Ship Scrap Dispute

Introduction

YieldStreet, a digital alternative investment platform, has once again agreed to a multimillion-dollar settlement with investors who faced significant losses from ship-scrapping loans gone awry.

This recent settlement, totaling $6.2 million, follows a class action lawsuit filed in 2020 by a group of investors against YieldStreet. The settlement, announced in a federal court filing in Manhattan, includes both cash compensation and waived fees for affected investors.

This agreement marks YieldStreet’s second major payout related to ship-scrapping investments within just over a year. In September 2023, the company settled separately with the Securities and Exchange Commission (SEC), paying $1.9 million to resolve allegations of non-disclosure.

The SEC had charged YieldStreet with failing to inform investors about critical risks in a $14.5 million securities offering involving a retired ship slated for dismantling and sale. Shipbreaking, or vessel deconstruction, involves purchasing old ships, beaching them, cutting them into parts, and selling them for scrap. An attorney representing the investors explained that YieldStreet raised funds for shipbreaking projects, yet some of these ships vanished before generating returns.

According to the class action court filing, by early 2020, six of YieldStreet’s maritime deconstruction investments, all tied to a single, unidentified borrower, had defaulted, resulting in approximately $87 million in losses for investors. Additionally, a separate YieldStreet offering related to a Louisiana oil and gas borrower led to a $12 million default in 2019, and that borrower subsequently filed for bankruptcy.

YieldStreet’s challenges with transparency, as alleged by the SEC, date back to September 2019 when it issued securities to finance a loan for ship transportation and dismantling. The SEC’s investigation found that the loan’s primary collateral was the ship itself, which was to be broken down and sold. YieldStreet’s right to seize the vessel in case of default was considered the most important security backing the investment, yet the company allegedly failed to disclose risks that could have compromised this right.

According to the SEC, YieldStreet was aware of red flags, including reports from YieldStreet affiliates indicating that other vessels securing similar loans from the same borrower had been deconstructed without notice or payment, sometimes with tracking systems deactivated, making the ships untraceable.

Despite these warnings, YieldStreet proceeded with the 2019 offering, omitting this material information from investors. Ultimately, the SEC alleged that the borrower dismantled the ship securing the September 2019 loan and misappropriated proceeds from the deconstruction, leaving investors with significant losses.