CINCINNATI - Before Candace Klein was at the center of Cincinnati’s latest business scandal, she was the city’s young entrepreneurial darling.
The hard-charging Northern Kentucky native was featured in the New York Times, Forbes, Business Week and other national publications that all seemed hungry to tell her story: How the self-described cancer survivor launched a thriving nonprofit to help women entrepreneurs and then became one herself by starting SoMoLend – an online lending platform that Klein proclaimed would “change the world.”
“You don’t see many people like her in life. You don’t see many people who literally do want to change the world, be it for their own advantage as well. But isn’t that the heart of American capitalism?” said Ian Edwards, a retired Procter & Gamble Co. executive who’s a local investor in SoMoLend. “She’s the American dream.”
This past week, that dream became a nightmare.
State Notice Includes Allegations Of Fraud
A June 14 notice from the state of Ohio’s Division of Securities made local and national headlines. The notice accused Klein, 32, and SoMoLend of a laundry list of misdeeds: 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.
The notice says, for example, that SoMoLend has generated only $3,404 in revenue to date, despite the fact that Klein had projected at a Greater Cincinnati Venture Association presentation that the company would have annual revenues of $1.5 million in 2012 and $10.2 million in 2013.
State officials stress that the allegations are just that, and Klein and SoMoLend will have a chance to defend themselves at a public hearing in October.
But the onslaught of negative publicity has shone a very different kind of spotlight on Klein and SoMoLend, which investors fear has been irreparably harmed by the state’s action.
On Wednesday, Klein left the company she started in an effort to save it. She resigned her job as SoMoLend’s CEO and stepped down from its board. The move left her unemployed with an uncharacteristically uncertain future.
Investors told WCPO Digital that they have known about the state’s concerns since the notice was issued June 14. State officials refused to say what triggered the “Notice of Intent to Cease and Desist Order,” saying that information is part of the investigation process.
There is no criminal penalty attached to the state’s allegations. If the state rules that SoMoLend and Klein have done everything as alleged in the notice, regulators would require SoMoLend to stop those practices, said Brian Hoyt, a spokesman for the Ohio Department of Commerce.
Those affiliated with SoMoLend, however, say the practical effect would be to prevent SoMoLend from operating in Ohio.
No Penalty Or Fine
“This sounds serious, and I don’t want to dismiss it. But it’s like a third-degree misdemeanor. It doesn’t carry any penalty or fine,” said Carlin Stamm, another local SoMoLend investor. “The state of Ohio could cause SoMoLend to be able not to do business in Ohio. But they can’t shut down the business.”
Stamm said that even large financial organizations that have been studying SoMoLend’s business model and have expressed interest in buying the company weren’t “troubled” by the state’s order, which SoMoLend disclosed to its suitors before the news broke locally.
“There’s kind of an attitude in business that Ohio is just Ohio,” he said.
But the media reports that have focused on the state’s specific allegations have hurt the company.
“The sad irony is that the state of Ohio is pursuing this case in the name of protecting the shareholders,” said Clifford Holekamp, a SoMoLend investor from St. Louis. “Unfortunately, what the state is doing, in their purported intent to protect our interest, they’re putting the company on the brink of going out of business.”
Edwards put it more bluntly: “I don’t need their protection, and it’s incredibly counter productive for entrepreneurs in Ohio.”
Investors say SoMoLend is racking up tens of thousands of dollars in legal fees to defend itself, dipping into the roughly $2 million in funding the company has raised that would otherwise be used to operate and grow the business.
And with the hit the company has taken to its reputation, any offer to buy SoMoLend is bound to be substantially lower than it would have been just six months ago, Stamm said.
“Candace is a verbose person, and she’s a promoter in many ways and an entrepreneur. And when she fixes on an idea, she wants to sell it for all she’s worth and sometimes she has a tendency to magnify or exaggerate,” he said. “Did she make some statements that were incorrect? Yes. But I will say no one who ever invested in SoMoLend invested in SoMoLend because of Candace Klein’s verbal statements.”
Friends, Supporters Were Shocked
So how did Candace Klein and SoMoLend get to this point?
That’s a question that Klein’s friends and supporters across the region have been asking themselves. Several told WCPO Digital they were shocked by the allegations reported in the media.
“Candace is a true innovator and pioneer in a lot of different areas,” said Dan O’Keefe, owner of O’Keefe PR & Marketing Solutions, a friend of Klein’s and an investor in SoMoLend. “When it comes to getting something started, Candace is who you want in your corner.”
O’Keefe’s firm handled public relations for SoMoLend as Klein was launching the company and worked to get federal crowd funding legislation passed. SoMoLend is a crowd funding business – designed so lots of investors can make small loans to businesses they want to support.
The federal JOBS Act, which Klein lobbied for in Washington, D.C., made crowd funding legal, but the Securities and Exchange Commission hasn’t finished writing the rules to regulate the practice. That has left companies such as SoMoLend in a limbo of sorts while they wait to figure out how to roll out their businesses fully.
“She helped draft the language in the JOBS Act,” O’Keefe said of Klein. “She helped start two of the organizations behind crowd funding. It’s just amazing how much time and effort she put in making sure, ironically, this industry protected all who were involved in it.”
SoMoLend was Klein’s big for-profit idea, following on the success of the nonprofit Bad Girl Ventures, which Klein founded to help local women entrepreneurs get the start in business they needed to be successful.
Klein left Bad Girl Ventures to dedicate herself full-time to SoMoLend a couple years ago. In interviews in 2011, she said she was inspired to start SoMoLend to help small businesses get the capital they needed to succeed.
Cancer As A Motivator
She said then that she was driven to do more because she had survived ovarian cancer.
“My real motivation was my cancer,” Klein said at the time. “I’m not guaranteed tomorrow. If I’m not here tomorrow, I want to make sure I’ve at least tried.”
Klein’s whole personal story is based on trying and pushing herself.
Her mother raised her alone when Klein was a young girl in Batavia. Her mom remarried, and they moved to Northern Kentucky. Eventually their family grew. Klein graduated from Northern Kentucky University and interned with the Northern Kentucky Chamber of Commerce in the organization’s public affairs department.
When a full-time job came open in that department about the same time Klein graduated, Chamber President Steve Stevens remembers that Klein pushed hard for the job.
“In typical Candace fashion, she came after me and said, ‘You want me to come work for you,’” said Stevens, who was the chamber’s vice president for public affairs at the time. Stevens had been talking to other candidates for the job, he said, but Klein wouldn’t take no for an answer.
“She was very persistent, gave me a resume and really worked hard,” he said. “I remember thinking, ‘I don’t have anybody with as much energy coming at me for this job as this.’”
Energy has defined Klein ever since. She wanted to go to law school but couldn’t afford it. She met with Alice Sparks, a well-known philanthropist in the region, who agreed to pay her way.
Sparks told WCPO Digital she remains fully supportive of Klein. “She was my friend yesterday, and she’s still my friend today,” she said.
Klein’s other professional experience includes a stint at United Way of Greater Cincinnati, a job as an economic development project manager with Property Advisors, and work as a lawyer at Greenebaum Doll & McDonald, Graydon Head & Ritchey and Ulmer & Berne.
She hasn’t actively practiced law in several years, though, as she’s worked to launch SoMoLend.
And now since leaving SoMoLend, she’s had to hire a lawyer to defend her – Northern Kentucky attorney Ben Dusing.
Dusing told WCPO Digital that while he’s still getting up to speed with the case, the allegations don’t make sense to him.
“Ms. Klein at the outset reached out to state regulators specifically to engage them in a proactive relationship designed to prevent the very circumstance that has now unfolded,” he said.
“The dogged enthusiasm with which the state has pursued this matter, particularly when viewed against the backdrop of Ms. Klein’s role in drafting legislation that would render state regulators irrelevant, raises serious questions about the political nature of the proceedings,” Dusing added.
One of the state’s allegations, for example, cites Klein’s participation in the drafting and release of a press release issued by CincyTech, an early investor in SoMoLend, saying the release solicited additional investors. CincyTech issues similar press releases for all the companies it invests in, and a spokeswoman for the organization told WCPO Digital that CincyTech isn’t aware of any other company that has run afoul of state regulators as a result.
'My Hometown Hero'
Michele Hobbs thinks politics are at the heart of the state’s allegations.
She’s one of the owners of Pet Wants, a pet food store with locations at Findlay Market and on Vine Street in Over-the-Rhine.
Pet Wants was the first winner of the Bad Girls Ventures business plan competition, winning a $25,000 no-interest loan to help grow the company. She gives Klein and Bad Girl Ventures credit for Pet Wants’ early success.
“Candace is still my hometown hero,” Hobbs said. “I know that everything she does, she does with good intentions and good faith.”
Plus, Klein has already announced that she wants to run for governor of Ohio in 2027, Hobbs noted.
“You can’t be a liar, you can’t be conniving, you can’t be misleading if you have goals that you’ve shared with everybody openly,” she said.
If anything, Stamm said, Klein is guilty of getting overly zealous about her expectations for success when talking to a crowd.
“The things she doesn’t do very well is when she’s talking, focusing on being absolutely 100 percent accurate,” Stamm said. “If one is good, two is better, you know? But I don’t consider that a damning criticism.”
Every entrepreneur has lofty goals and optimistic projections, Stamm said. And sophisticated investors, like the venture capital investors who have helped fund SoMoLend, don’t make decisions based only on what the company founder tells them.
Hobbs is convinced that Klein will find a way to take this difficult situation and use it to make her stronger.
“There are bumps in the road, and there are mountains,” Hobbs said. “Candace has crossed mountains already in her personal life. This is not something that will break her. It’s her business cancer, so to speak.”