Candace Klein: SoMoLend startup is 'dead,' Klein's lawyer tells administrative hearing officer

Monday marks first day of lengthy state proceeding

COLUMBUS – SoMoLend, the startup that helped put Cincinnati on the national crowdfunding stage, is dead, according to a lawyer for its embattled founder.

“The company’s dead. The company’s out of business,” Eric Fogel said Monday. “SoMoLend is either going to file for bankruptcy, or it’s going to liquidate the company, sell off its assets or do something similar.”

Fogel’s description of SoMoLend’s fate as a business came early in the first day of a hearing that could determine the professional fate of its founder, Candace Klein.

SoMoLend, which stands for social, mobile, local lending, was designed to help small businesses borrow money in small amounts as one of the nation’s first debt-based crowdfunding platforms.

But the company and Klein ran afoul of Ohio state regulators last year.

The hearing represents Klein’s opportunity to defend herself against the Ohio Division of Securities' allegations against her and SoMoLend.

The division filed a document last June known as a “notice of intent” to issue a cease and desist order. That document accused SoMoLend and Klein, the company’s CEO at the time, of a variety of 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. Klein is fighting the state, and Monday’s hearing marked the first day of that fight. The proceedings could last 10 days or more.

Fogel, a partner at Chicago-based SmithAmundsen, argued that the whole matter is now “moot” since SoMoLend is effectively defunct and Klein is no longer working there. She resigned as CEO last August in an effort to save the business. Since then, Klein testified, she has been doing consulting work for a business in California and a nonprofit in Arizona.

Klein also still is the majority owner of SoMoLend. Her lawyer said that doesn’t amount to much.

“You’re going to hear testimony that investors already voted to liquidate the company,” Fogel said during his opening statement. “When the state brought this order, that effectively killed the young business.”

But Assistant Attorney General Keith O’Korn argued in his opening statement that the proceedings still matter.

“We believe these contentions are red herrings and distract from the real issues of the case,” he said. “Evidence will show Ms. Klein was selling securities. Evidence will show she made false and misleading statements.”

Added O’Korn: “She knew better. This conduct, we believe, is not good for Ohio businesses or good for the investors.”

Witnesses Talk About Leadership, Failings

Klein’s team of attorneys called DJ Paul as their client’s first witness in the hearing. Paul is chief strategy officer for Gate Global Impact, a New York-based global investing firm. He also worked with Klein to co-found CfIRA, a group of industry insiders known as the Crowdfund Intermediary Regulatory Advocates who have been working with the U.S. Securities and Exchange Commission to write federal regulations for the emerging crowdfunding industry.

Paul testified that Klein was a respected leader in the crowdfunding industry, so much so that her colleagues chose her as the first chair of the CfIRA board after the organization was created.

He said she often took part in meetings with federal regulators and worked to ensure that crowdfunding rules were written in a responsible way that would protect investors.

“In all the meetings that she and I attended with respect to regulators, I have always found her to be forthcoming and honest,” Paul said. “It would be nonsensical for someone who is attempting to hide something to be that active.”

Paul also testified about a letter that Ohio Securities Commissioner Andrea Seidt sent to federal regulators regarding crowdfunding. Attorneys for Klein have argued that Seidt opposes crowdfunding generally and are trying to compel her to testify in Klein’s hearing.

After studying that document, Paul said, CfIRA “informally advised our membership to be very careful about doing business in Ohio and indeed they might want to avoid Ohio entirely on the basis of this paper.”

SoMoLend investor Ian Edwards was the first witness called by the state to testify. (Several people associated with SoMoLend told WCPO privately that testifying as a witness for the state should not be construed as being "for" the state's case or "against" SoMoLend.)

Edwards, who lives in Cincinnati, said he invested $10,000 in SoMoLend based on his fondness for Klein and never really expected to make any money on it.

“I thought the idea had a very small chance of success,” he said, in part because of the tough regulatory landscape in Ohio.

“Going into something where the regulation is unclear is extremely risky,” he said, adding that he worried that the company would eventually have trouble with state laws.

Still, Edwards said, he was impressed with how far Klein

got.

“Whatever mess she might be in now, everybody has to love the fact of how far she got with an idea she was passionate about,” he said.

Afternoon Proceedings Focus On Klein's Public Speaking

Assistant Attorney General Rachel Huston questioned Klein for the second half of the day’s proceedings.

Huston showed a series of videos of Klein making presentations, doing webinars and being interviewed in various setting, including a video where Klein advised other entrepreneurs to “appeal to their greed” first when approaching potential investors.

Fogel objected to every video, saying they were irrelevant to the proceedings. He said the state hadn’t presented any evidence that anyone relied on any of the presentations to invest and that some of Klein’s statements were taken out of context.

The comment about greed, for example, was intended to communicate that entrepreneurs should list their financial projections first in a presentation rather than including them at the end, he argued.

But Huston said the videos show Klein’s “state of mind” related to SoMoLend. And, she said, Ohio state law doesn’t require that an investor had to act on Klein’s statements for her presentations to have been inappropriate.

The administrative hearing will continue Tuesday. Klein’s lawyers will call two witnesses in the morning, and lawyers from the attorney general’s office will continue to question Klein after that.

For more stories by Lucy May, go to www.wcpo.com/may. Follow her on Twitter @LucyMayCincy.

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