Investors in a firm led by ex-Salus Capital Partners chief executive officer Andy Moser were unaware of fraud allegations made against him, as well as subsequent findings from an arbitration proceeding, sources familiar with the situation told Private Debt Investor.
Merchant 360 Solutions, SB Capital and Arena Investors were the first three investors of Scargo Hill, a private debt firm founded in January by Moser, Thomas Lynch and Mark Gallivan. The firm was set up to provide asset-based loans to retailers.
PDI understands these investors went unnotified about accusations from Salus that Moser misused corporate finances and falsified billing records while at his former firm. In April of this year, Salus, which is known for investments including a $250 million term loan to now-bankrupt US electronics retailer Radioshack, was issued a $2.6 million final award after arbitration stemming from those allegations.
Moser was required by the contract with the firm’s investors to disclose the arbitration proceeding, a source familiar with the matter said, but failed to do so.
“With respect to the information provided to investors considering an investment in a fund,” Siobhan Burke, a partner at Paul Hastings that specializes in private fund formation, said, “a key issue is making sure you have not made any untrue statement of material fact or omitted any material fact. Materiality is considered in the context of whether a reasonable investor would consider the information important in deciding to invest in the fund.”
Lynch and Gallivan were also not aware of the charges, arbitration or its results, a separate source said. The men found out in mid-July after reading a New York Post article that covered papers about the case filed in the New York State court in Manhattan.
It is understood that, consequently, Lynch and Gallivan were considering rebranding and launching another firm, the separate source said. It was not immediately clear which its initial investors might be.
Scargo Hill and its three investors declined to answer questions about the matter.
A further source did not specify the precise due diligence steps taken by Scargo Hill’s investors or co-founders in this case, but said, in this situation, it was not customary to conduct a background check. Even if the investors had conducted such due diligence, the arbitration was private, meaning the proceeding would not have turned up in a background check.
“There’s not a public filing where you can search a public record and find an arbitration proceeding. Even if it had been litigation, it’s unlikely you’re going to do a litigation search in every state and every county,” Burke said.
The accusations made against Moser stem back two years. While at Salus, Moser put at least $140,000 on Salus credit cards to purchase, among other things, audio visual equipment and a personal vacation, according to the court papers. He was also found in the arbitration proceeding to have tried to falsify payments to the AV vendor, the papers showed.
After a “routine due diligence” of his email following his departure in April 2015, the firm found an email to the AV equipment vendor that gave rise to the misuse of corporate finances and fraud charges. In response, Salus hired law firm Skadden, Arps, Slate, Meagher & Flom to conduct an internal investigation and engaged AlixPartners for forensic accounting services.
The firm launched an arbitration proceeding in September and sought to recover from Moser for the claims listed above.
The arbitration hearing, at which Moser did not show, took place in October 2016 and two months later arbitrator Alfred Feliu issued his findings. The $2.6 million awarded in April included damages for the fraud charges as well as breach of fiduciary duty, several other charges and attorney’s fees.
In late July, the case was transferred from the state court to a Manhattan federal district court, where it is pending. In federal court papers, Moser said he planned to reimburse Salus for $110,000 in personal expenses and that he used the company credit card so Salus could accumulate points that would go toward charity. He contends the award was “disproportionate to the amount in controversy” and has sought to have the proceeding dismissed.
Moser is no longer with Scargo Hill, one of the sources familiar with the situation said, adding that the departure was voluntary and due to these findings.
Jeffrey Wurst of Ruskin Moscou Faltischek, Moser’s attorney, could not be reached to answer questions about the matter or make Moser available for an interview. Salus attorney Leonard Rodes of Trachtenberg, Rodes and Friedberg, could not be reached for comment.