In Act 1 Scene 3 of William Shakespeare’s Hamlet, Polonius provides his son Laertes with a simple life lesson: “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.” Translated to modern text the line means: “Don’t borrow money and don’t lend it, since when you lend to a friend, you often lose the friendship as well as the money, and borrowing turns a person into a spendthrift.”1
The equipment leasing and finance industry is built upon a foundation of lending and borrowing. It is the lifeblood of our existence. We lend without worry of damaging our relationship with our borrowers because we complete due diligence and underwrite the risk. And while some of our borrowers may appear to be spendthrifts, we protect our investments by limiting the amount extended to any creditworthy borrower. What they buy and how they spend is primarily the customer’s choice, as we tend to rely on caveat emptor — let the buyer beware — when it comes to these choices.
But what if the buyer is being intentionally misled by the seller? What responsibility do we have as lenders in such transactions?
In the May/Jun Vendor Leasing & Finance issue of Monitor, I wrote about how customer demands for more flexibility are changing the way vendors and their finance partners must work together. I questioned whether the hell-or-high-water provision will remain a standard documentation requirement for a managed solutions transaction covering multiple vendors delivering products, software and services over an extended period of time. Moreover, I asserted that finance partners will need to be more thorough in their underwriting and approval of new vendor partners that will bear performance risk over the life of their customers’ lease or loan contracts.
A History of Bad Decisions
During my decades in the business, I have found that the good companies underwrite their vendor partners as seriously and thoroughly as they do their lessees. However, on occasion, competitiveness, ego or greed influences the actions of decision makers in successful leasing companies. Oftentimes, these poor decisions result in portfolio problems and eventual write-offs.
We saw it in a big way with NorVergence, a fraud that seduced many lessors. Businesses were duped by the NorVergence black box that promised to significantly lower telecommunication costs. The savings never materialized. In 2004, a New Jersey judge challenged the enforceability of the hell-or-high-water clause in the Norvergence lease agreements. It caused an uproar among leasing industry participants, particularly the legal staff of nearly every lessor.
We saw it again with Royal Links, a beverage cart sold to several golf courses with the promise of lease payments made via sign advertising revenues, which, of course, never materialized. A similar scam from Brican was aimed at dentists and optometrists who were induced to sign lease agreements for flat screen televisions where advertising would be displayed in patient waiting areas, the revenues from which were supposed to make the lease payments. Again, adequate revenues were never produced.
Duped Again
It is hard to believe that another case of avidity has once again hit our industry, involving at least three lenders — Ascentium Capital, Balboa Capital and Univest Capital — with purportedly at least $45 million in affected contracts. Ascentium and Balboa apparently financed the transactions through a relationship with America’s MHT, a vendor that targeted physicians with the lure of a rainbow with a pot of gold at the end.
According to documents filed with the court, Medical Home Team (MHT) offered doctors the opportunity to purchase a $300,000 “program” to oversee a group of visiting nurse practitioners in an assigned territory near the doctor’s place of business. The MHT program included a software license, a couple iPads and some off-the-shelf billing software. The doctors didn’t shell out the $300,000 in cash. Instead, they signed contractual agreements and personal guaranties with Ascentium and Balboa. To thicken the plot, MHT formed a separate and distinct limited liability company for each licensee, with the doctor listed as the sole member. MHT also opened bank accounts for each LLC, which MHT arranged to manage on behalf of the doctors.
Sound too good to be true? It was. Turns out it was nothing more than a Ponzi scheme. Ascentium allegedly hoodwinked Univest into the deal by offloading some concentration risk via assignment to Univest. Ascentium, Balboa, MHT and its president, Scott Postle, have been named as defendants in multiple lawsuits, including at least one class action suit. To add fuel to the fire, the suit also named Cliff McKenzie, Ascentium’s former senior vice president of sales. It seems that old Clifford was double dipping. He was employed by Ascentium while allegedly taking $20,000 per month from MHT to keep the scheme afloat.
In March, Univest filed 20 suits against Ascentium for breach of representations and warranties of the assignment agreement through which Univest purchased contracts originated under the MHT vendor program.
Ending the Shell Game
MHT began selling their program as early as 2012. Speculation among plaintiffs’ attorneys is that hundreds of doctors were swindled through this Ponzi scheme. Money funded by the lenders to MHT was used to make the payments due, creating the appearance of success…until the music stopped playing. In 2016, Ascentium and Balboa began sending out late notices and threatening default. MHT was unable to secure enough financing to continue the shell game. In April 2017, licensees received a letter from MHT CEO Scott Postle announcing the cessation of business effective April 16, 2017.
Asking Why
There has been much written about NorVergence, Royal Links, Brican and MHT. A Google search of any of the names accompanied by the word fraud will reveal the details of each scheme. I won’t go into further minutia related to the who, what, when or where of these perpetrated and proven fraudulent schemes. Instead, I want to dig into the why.
In each example of clear deception, it’s natural to wonder what the funding sources were thinking when they approved each vendor and proceeded to buy their dubious transactions. How did they slip through the controls and safeguards installed to prevent such breaches? It is my contention that competiveness, ego and greed greatly contributed to the failure of each lender’s ability to see through the deception.
Why were each of these frauds allowed to perpetuate without greater scrutiny from their lenders? Why wasn’t proper due diligence completed on each of the fraudulent vendors? Why didn’t the risk teams from each lender conduct a better assessment of the sustainable business model for each vendor? Why were such obvious scams allowed to prevail?
If It Quacks Like a Duck…
Years ago, I had a credit manager who cut off a vendor of mine, a very successful value-added reseller, because the company was growing too fast. To me, a young buck enjoying the success of growing volume from a new VAR, these guys were golden. To our chief credit officer, it was simple prudence. He warned me, “If it quacks like a duck and it walks like a duck, then it’s highly likely that it is a duck.” He and I talked it over and decided that we should invite the principal of the company to our headquarters to present his business model and explain the reason for his high growth trajectory. Our client agreed to the meeting and made a great presentation of his business model and its long-term sustainability. We reinstated his company and enjoyed a strong business relationship for many more years.
It is the responsibility of the lender to know exactly what they are financing, to know the value of the product, software or service provided to the end user and to know the orderly liquidation value of the financed product if it were to be returned due to credit default. Seemingly, this process was altogether skipped or overlooked in each lender’s review of MHT.
Why did Univest buy into the scheme at such a late stage without seeing the writing on the MHT wall? Were they misled by Cliff McKenzie? Chances are good he failed to notify Univest that he was being paid by both Ascentium and MHT. Why did Warburg Pincus, a leading private equity firm, agree to buy Ascentium last October, when — most certainly — the severity of the MHT problem must have been disclosed? What got in the way of full disclosure during a time of probable due diligence?
Former U.S. Treasury Secretary Timothy Geithner serves as president of Warburg Pincus. In this role, he focuses on overall firm strategy and management, investing and portfolio management. While $45 million is a big number, it may not be significant enough to garner Geithner’s attention. However, it seems reasonable to think that someone at Warburg Pincus is questioning the rationale behind the firm’s investment in Ascentium.
Competition, Ego & Greed
Why does the equipment finance and leasing industry expose one of these frauds every few years and act surprised that such an obvious Ponzi scheme could be pulled on members of our astute lending community? Again the answer remains — competitiveness, ego and greed.
Competitiveness — the drive and need to win. Win the big deal. Land a big new vendor program. Come out on top. Undoubtedly, the folks at Ascentium, Balboa and Univest were enticed by the competitive desire to win. Their competitiveness prevented them from seeing the obvious.
Ego — one’s self-image, self-esteem, self-importance. Both buyers and sellers fell victim to their egos. Both the lenders and the doctors wanted to be more successful — they wanted to look good. MHT initially delivered and later denied them that privilege.
Greed — the excessive desire for wealth or possessions. Certainly, the greed of Scott Postle, CEO of MHT, who mislead unwitting doctors into believing his business model was valid. Greed was twinkling in the eyes of those same doctors when they were told that the MHT program would generate hundreds of thousands of dollars in additional yearly income. Greed drove McKenzie to sustain the fraud by finding Univest, and perhaps others, to offload worthless paper in order to make room for more at Ascentium.
To quote Mahatma Gandhi, “There is sufficiency in the world for man’s need but not for man’s greed.”
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