Photo By: Ellie Van Houtte/town Crier
SB Capital’s San Antonio Road offices, listed as “Investors Prime Fund,” are housed in the same building as Heritage Bank. The investment firm’s offices buzzed with activity after court-appointed receivers laid off most of the staff and assumed control late last month.
Investors learned last week that much of their money remains secure, for now, in Small Business Capital Corp.’s frozen assets.
The Securities and Exchange Commission (SEC) targeted the Los Altos-based investment firm with accusations of fraud and operating a Ponzi-like scheme last month. But based on the most recent accounting presented in court, investors in the mortgage lender stand to recoup as much as 75 percent of their principal from its two funds, Investors Prime Fund and the SBC Portfolio Fund.
The exact amount they recover depends in part on the court-appointed receiver charged with liquidating the company. How profitably the assets can be salvaged, offset by the expenses tallied along the way, will determine investor losses. In some instances, the fraud investigation process takes a major chunk out of salvaged assets.
When the SEC filed a complaint June 21 against SB Capital and founder Mark Feathers, it alleged that the company misled investors in a “Ponzi-like” manner and improperly transferred investor money to generate false profits.
The Thomas Seaman Co., the Irvine-based receiver appointed by U.S. District Judge Edward J. Davila, submitted its first report last week providing an inventory of SB Capital’s assets. In instances of alleged investment fraud, a court-appointed receiver assumes control of the business, performs an accounting and attempts to recover assets.
Local investors awaiting a preliminary tally of assets at SB Capital heard mixed news last week. At a July 10 hearing, Seaman said that although investors were owed more than the company’s assets, the company’s profitably performing loan portfolio represented “good news.” Seaman said the receivership could sell off the company’s assets individually or en masse as a “going concern.”
He said that in addition to $10.2 million now in his possession as receiver, SB Capital holds a loan portfolio worth approximately $22.4 million. That figure includes a write-down for seven loans Seaman described as “nonperforming or impaired.” In total, he estimated that the company had amassed unpaid principal – funds owed to investors – of $46 million, yet had total assets of approximately $34 million. The anticipated shortfall, $12 million, might mean investors could expect a payout of 74 cents on the dollar, with two major caveats. Investors milling around the courtroom after the hearing worried that a fire-sale dissolution of the company’s assets would further depress the portfolio value, incurring possible additional losses for investors. They also expressed anxiety over whether receiver expenses would deplete the estate.
SEC attorney John Bulgozdy said investors would receive a distribution when the estate was liquidated, and told Davila the SEC would “keep a close eye on the receiver’s fees and his attorney’s fees.”
Davila said that preserving investors’ depleted assets was of “paramount importance.” Seaman has handled estates of more than $100 million in the past, and Davila asked how he planned to scale down his time commitment and fees for the smaller account. The receivers are tasked with maximizing the company’s assets with a minimum outlay in administrative and legal fees. Feathers and SB Capital – and thus, by extension, its investors – must cover the expenses incurred by the receiver.
Headline news of outsize payments to court receivers might give investors the jitters, but Seaman’s track record shows recent instances in which his fees represented a small fraction of the assets he recovered.
Seaman has managed approximately 175 receiverships since founding his company in 1995. Some saw significant returns to victims, others not. Receivers can sometimes “pay for themselves” if their investigation uncovers sources of funds above and beyond salvaged investor capital.
In the case of Colin Nathanson, a golf club manufacturer who raised $28 million from 2,600 investors in a pyramid scheme, victims were told to expect less than $100 each from estate liquidation. Part of Seaman’s task, in that receivership, included suing lawyers associated with Nathanson for negligence.
The payment settling those damages covered the receiver’s fees, leaving the (meager) principal exclusively for investor payback. Over the five years that he worked that case, Seaman received approximately $600,000 in costs and fees, billing at an approximate rate of $170 per hour. Charges included accounting, bookkeeping, liquidating assets and managing investor relations.
Judges hold veto power
Davila will review all costs associated with the SB Capital case. Judges have the authority to refuse to approve fees they consider inappropriate. In the WexTrust Capital Ponzi-scheme investigation, ongoing in Chicago, Judge Denny Chin balked at the lopsided accounting last year. The estate had paid more than $15.5 million to firms working on the case, while disbursing only $5 million to the victims (a 2 percent recovery of their assets). Seaman’s firm is not involved in that estate.
Chin received letters of objection from investors, one of whom wrote that the receiver’s fees in that case were “sucking the estate dry.” Another lamented that under the receiver’s care, the estate had dwindled from $105 million in cash and equity to a $5 million distribution and $15 million-$20 million in fees.
For more information and updates on the receivership, visit sbcapitalreceiver.com.