CINCINNATI – Northern Kentucky native Candace Klein is either a passionate champion for crowdfunding who is being persecuted by regulators or a relentlessly ambitious entrepreneur willing to say whatever it takes to succeed.
A new hearing in the case against her was set to start Monday in Columbus. (WCPO's Lucy May will follow the case. Follow her on Twitter at @LucyMayCincy for updates as they happen.)
Pre-hearing briefs filed Feb. 12 in an Ohio Division of Securities case against Klein paint those two starkly different pictures of the embattled founder and former CEO of Cincinnati-based SoMoLend.
The briefs, obtained by WCPO through a public records request, set the stage for a hearing in Columbus scheduled to start Feb. 19. Neither Klein nor state officials have been willing to say much publicly before the hearing.
As a result, the brief filed by Klein’s Chicago-based attorney offers her most detailed public defense since last August, when the state’s allegations against her and SoMoLend made local and national headlines.
In the brief, attorney Michelle L. Casper argues the Ohio Division of Securities’ allegations have gone “overboard and are completely without merit.”
Those allegations were detailed in a June 14 notice from the division, which accused Klein and SoMoLend of various misdeeds. Those included selling unregistered securities, committing securities fraud by overstating SoMoLend’s early success and making fraudulent financial projections by exaggerating revenue projections during public presentations and statements.
SoMoLend reached a settlement with the state on Feb. 10.
The company’s settlement agreement makes clear that the issue will not prevent SoMoLend from doing business in Ohio once the state has drafted rules for crowdfunding based on the federal JOBS Act. It also eliminated fraud allegations against the company, noted Chris Calvert, SoMoLend's operations executive and counsel.
"In our view, this was a successful outcome," Calvert said. He added that he couldn't say what the company's future will be because those decisions still are being made.
Klein's Brief: No Fraud, No Victims
Klein appears ready for battle with state regulators at the hearing, which could determine her future in the crowdfunding industry she helped shape. She resigned as SoMoLend's CEO in August in an effort to save the company.
Crowdfunding is a way for individuals or businesses to raise money by getting small amounts of cash from lots of people. SoMoLend has been working to create an online crowdfunding platform for small businesses that need loans that often are too small to appeal to traditional banks.
In her brief, Casper argues Klein worked tirelessly to promote the fledgling crowdfunding industry and became a recognized leader. The media spotlight found her as a result, the brief states.
“Everyone wanted to be in Klein’s world,” the brief states.
She also argues that Klein couldn’t have sold unregistered securities because SoMoLend was designed to facilitate small business loans, not sell securities. What’s more, all of Klein’s investors in the company were sophisticated and knew the risks going in, she wrote.
At the times that Klein misstated SoMoLend’s revenues or financial projections, she simply mixed up figures on the fly and wasn’t trying to convince anyone to invest based on her statements, the brief states.
“She might have blended a few facts together in her exuberance ‘on the spot,’ but she never knowingly made or caused to be made any false representations,” the brief states.
And even if any of Klein’s actions were illegal, the law has since changed, the brief argues, making a “cease and desist” order unnecessary.
“The Division is pursuing Ms. Klein for violations where there are no victims, where no investor is complaining, where she pocketed no money for herself, based on activities that have either already ceased or been remediated,” Casper wrote.
State's Brief: False Statements Were 'Bait'
Lawyers for the state have a much different view in their pre-hearing brief.
They describe Klein as “so relentless in building her company that she was willing to flout the law and mislead potential investors and the public in order to do so.”
They wrote that it doesn’t matter that the law has changed because Klein violated the laws that existed at the time.
And they state that she committed securities fraud even if investors weren’t hurt by her actions.
The state’s lawyers argue that Klein’s publicly stated financial projections were not made in good faith and that Klein admitted she didn’t know how to make a five-year projection.
At one point, they wrote, Klein estimated the projected “exit value” of SoMoLend to be $66 million in 2014. That would mean investors would earn a 4,400 percent return on their investments if the company were sold that year.
She also projected an “exit value” of $182 million in 2015, the state’s brief says, or a 12,100 percent return for investors.
“The Division cannot conceive of a lawful and legitimate business
capable of generating a return in excess of 12,000 percent in four years,” the state’s lawyers wrote.
The lawyers argue Klein used those false statements as “bait” to lure future investors.”
Klein’s lawyer, on the other hand, comes to a very different conclusion:
“At the end of the day, we believe that you will see Klein the way the rest of the world does – as an energetic, passionate entrepreneur who worked round the clock to pioneer a new company in a new field.”
At the end of the upcoming hearing, a hearing officer will have to decide which picture of Klein to believe.
For more stories by Lucy May, go to www.wcpo.com/may . Follow her on Twitter @LucyMayCincy.