How Harvard University secretly funds a giant, questionably legal payday loan scheme

Just because Harvard University is an Ivy League school does not mean that all of its officials and administrators have Ivy League scruples.

According to a report by Bloomberg News, private equity fund manager and technology financier Alex Slusky came under pressure some years ago to put to work the $1.2 billion he had raised to rescue struggling software companies.

By 2012, however, a number of investors — which included Harvard — were antsy and upset that about half the money remained unused and uncommitted, three people with insight into the situation told Bloomberg News, which continued:

Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday-lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI LLLP. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600 percent interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

In the end, one of the nation’s oldest institutions of higher learning, which educated U.S. presidents, world leaders, American heroes and founding fathers, had become involved in the rancid payday loan business, sharking for low-income, desperate people.

Crackdown has driven the business online

Bloomberg reported that Slusky’s fund, called Vector Capital IV LP, bought into Cane Bay early 2013, say witnesses, one of whom — an ex-Vector employee — said that the private equity company did not inform investors that the firm had entered the payday loan business, in which borrowers repay loans from their next paycheck.

The equity firm’s investment in Cane Bay demonstrates the draw of the payday loan business and its criminally high rates of return, though most states have now restricted its business or banned it altogether to protect consumers from the predatory practices.

The crackdown on brick-and-mortar lenders has driven the desperate online, however; now, internet payday lending in the U.S. has doubled in size and scope since 2008 and now stands at a whopping $16 billion annually. Half of that amount is made by lenders based in offshore havens or those affiliated with Native American tribes in the United States who point out that state laws do not apply to them since they are on federal reservations, John Hecht, an analyst with the Jefferies Group in San Francisco told the financial news website.

“A lot of these businesses, they run it just knowing that there’s regulatory risk and they may have to terminate the business,” Hecht told Bloomberg.

A spokesman for Cane Bay in New York City, Ronn Torossian, told Bloomberg that the firm does not make payday loans but instead provides services to financial companies.

“Cane Bay Partners is a management-consulting and analytics company,” Torossian said in an e-mail. “In the past, the owners held minority positions in some licensed short-term lending businesses, which are no longer in operation.”

States are going after payday lenders

Bloomberg reported that Slusky, who is the founder of Vector, did not respond to emails seeking comment and hung up his cell phone when reached at that number. But David Baylor, who is Vector’s chief operating officer, said that the firm never misled investors.

“Any implication that we have not provided complete and accurate information to our investors about one or more of our investments is false,” Baylor also wrote in an e-mail to Bloomberg News.

Harvard was cited specifically in a 2007 press release from Vector as a “significant new investor” in the investment fund; officials there also declined to comment to Bloomberg. Other investors, which included another storied U.S. institution of higher education, the Massachusetts Institute of Technology, would not comment either.

Regulatory officials who have pursued payday lenders told Bloomberg that they had not heard of Cane Bay. Arkansas Deputy Attorney General Jim DePriest told the financial news site that his state had closed a majority of payday lenders in 2010 after voters passed a ballot measure that capped interest rates at 17 percent.