Tecku v. YieldStreet Inc.

Background

Michael Tecku, David Finkelstein, Lawrence Tjok, and Adrienne Cerulo sued Yieldstreet Inc., Yieldstreet Management LLC, YS Altnotes I LLC, YS Altnotes II LLC, and Michael Weisz on behalf of themselves and proposed similarly situated investors. They alleged three claims arising from investments in Yieldstreet security offerings, including borrower payment dependent notes tied to the performance of underlying loans.

The plaintiffs alleged that Yieldstreet’s private placement memoranda and other communications made material misrepresentations or omitted important information about the risks, vetting process, lending models, borrower concentration, and experience of those managing certain investments. They focused particularly on vessel-deconstruction investments and a Louisiana oil-and-gas fund. The plaintiffs alleged that some investments went into default, while the defendants disputed that assertion.

Defendants’ Arguments

The defendants argued that the plaintiffs lacked standing because their investments were not in default and they had not suffered an injury. They also argued that Delaware securities law did not apply, that certain Yieldstreet entities had not offered or sold the securities, that Yieldstreet Management did not owe a fiduciary duty, and that the complaint failed to identify material misrepresentations or omissions for many investments. The opinion states that the court construed the defendants’ premotion letter as a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally valid claim.

Standing

The court held that the plaintiffs had standing to assert claims seeking rescission, meaning cancellation of the investments and recovery of the amounts paid or related damages. Although the materials before the court suggested that the investments did not yet appear to be in default and collection efforts remained ongoing for many notes, the court concluded that the possible absence of default did not defeat standing at the pleading stage. The court noted that any recovery from the investments would offset damages and that the action might later be dismissed if there were no damages, but found that the complaint adequately alleged an injury for purposes of standing.

Delaware Securities Law

The court rejected the plaintiffs’ argument that Delaware securities law applied. The plaintiffs relied on the involvement of a Delaware trustee, the Yieldstreet companies’ incorporation in Delaware, and a Delaware choice-of-law provision in a subscription agreement. The court concluded that these facts, even together, did not establish the required connection between Delaware and the transactions.

The court explained that incorporation in Delaware alone does not subject a corporation to Delaware securities laws, and a contractual choice-of-law provision does not authorize applying those laws outside Delaware. The complaint did not allege that the trustee acted improperly or that the indenture agreement contained the alleged misrepresentations. Because Delaware law did not apply, the court dismissed Counts I and II without prejudice and did not reach the defendants’ remaining arguments about the substance of those counts.

Fiduciary-Duty Claim

The plaintiffs brought Count III against Yieldstreet Management for breach of fiduciary duty. The defendants argued that Yieldstreet Management owed the plaintiffs no such duty. The court stated that the complaint alleged Yieldstreet Management was a registered financial adviser and that whether a fiduciary relationship existed depended on the circumstances, particularly the nature of the advice provided.

The court was skeptical that Yieldstreet Management ultimately owed the plaintiffs a fiduciary duty, but found the claim plausible at this early stage. The complaint alleged that Yieldstreet Management authored publications promoting the economic benefits of the investment products and encouraging members of the public to invest. The court concluded that dismissal of Count III was inappropriate, while noting that further examination of the relationship and communications could show that no duty was owed.

Disposition

The court ordered that the defendants’ motion was denied in part and granted in part. Counts I and II were dismissed without prejudice, while Count III remained. The plaintiffs were ordered, within 20 days of the order, either to file an amended complaint or to notify the court that they would proceed with the complaint as filed.