The YieldStreet Mousetrap

“The early bird may get the worm, but the second mouse gets the cheese.” – Steven Wright

Good investing is intentionally boring. You buy high quality stuff, pull a few weeds here and there, rebalance systematically, and wait patiently. Over time, wow has it created a lot of wealth.

But since good investing is boring, there will always be salespeople who try to build a flashier choice which plays on the human emotion of greed.

The website of a company called YieldStreet reads “private market investing” with “highly-vetted investments”.

But, according to a Securities and Exchange Commission complaint dated September 12, 2023, some of the YieldStreet investments may not actually be “highly-vetted”.

Have you ever heard of Ship Breakers? These are people who buy old ships, dismantle those old ships, and sell the scrap metal and ship parts for a profit. The environmental and safety concerns involved make this a high-up-front-cost business. So ship breakers have always yearned for a way to get money up-front so they could break more ships. Along comes YieldStreet.

YieldStreet sold the idea to potential investors. Give some of your money to Yieldstreet, they will invest it in ship breaking.

So where’s the problem? The problem is in how the investor money was supposed to be protected.

Think of it this way: if a bank lends you money to buy a house (mortgage), and you don’t pay the bank back, the bank takes your house. But this type of arrangement is tough to set up in ship breaking.

Per Matt Levine of Bloomberg, “the order of operations is…

1. You lend them money to buy the ship.
2. They buy the ship, giving you a lien on the ship as collateral for your loan.
3. They sail off in the ship, yelling “don’t worry, you have a lien!” as you wave to them from the pier.
4. They cut the ship into itty-bitty pieces and sell the pieces for money.
5. They don’t pay you back.
6. You go to seize the ship.
7. There is no ship? Obviously? Like, that was the whole point of the transaction? They borrowed money from you to buy a ship and then cut it into itty-bitty pieces? At the time when they are supposed to pay you back, why would there be a ship?”

According to the SEC, this is the scenario which played out for YieldStreet investors.

Be careful. Someone will always be there to sell you the dream, but you get to live the nightmare alone.

Questions? As always, we are here to help you.

Authors: Rick Wagner & Keith Wagner

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