A federal judge has revived a shareholder lawsuit alleging that top Higher One executives doomed the once highflying New Haven company by failing to comply with a federal consent decree and enriched themselves through suspiciously timed stock sales.
Higher One’s failure to correct abusive bank fees and marketing practices as required by a 2012 settlement with federal regulators eventually led to huge monetary penalties that crippled the company and tanked its stock, the suit alleges. The company was sold off in pieces in 2015 and 2016.
Executives knew required reforms were not being carried out, but falsely claimed or implied they were in public statements and regulatory filings from 2012 to 2014, the suit charges. During the same period, certain Higher One leaders, including two of its founders, engaged in “massive insider selling,” dumping at least $12.5 million worth of stock before its price crashed, the suit charges.
U. S. District Judge Alvin W. Thompson dismissed the original complaint in 2016, but effectively reinstated the action Sept. 25 when he let stand all but five paragraphs of an amended 118-page filing containing new witnesses and evidence.
The suit’s revival is the latest chapter in Higher One’s dramatic fall from earlier this decade when local and state politicians praised its success and Yale University officials touted it as an example of student entrepreneurship.
Founded in 2000 by three Yale undergraduates, Higher One specialized in distributing college student financial aid refunds. After a slow start, the company took off in the late 2000s as schools hired it to cut costs following the 2008 financial crisis. Higher One went public in 2010 and eventually served more than 1,900 campuses with 13 million students.
But Higher One’s business practices attracted controversy and complaints almost from the beginning. The company’s preferred distribution method was via bank accounts it offered students through a partner bank. Students complained of deceptive marketing intended to make them think a Higher One bank account was required to collect their refunds.
The firm also erected obstacles to receiving refunds by paper checks or transfers to other banks, students said. Once signed up, Higher One hit students with poorly disclosed and abusive bank fees, they said.
The lawsuit also alleges that Higher One improperly overdrew student accounts, generating a $35 fee that was supposed to be rebated. The firm, however, assigned just one person one day a week to manually enter refund codes, keeping the accounts negative upwards of a week and thereby generating more fees.
The complaints eventually attracted the attention of federal regulators. In 2012, the Federal Deposit Insurance Corp. confirmed most of the students’ complaints and reached a settlement requiring Higher One to refund $11 million, pay an $110,000 fine and reform its practices and procedures. Around the same time, the company settled a raft of class action lawsuits for $15 million and similarly agreed to reform itself.
Executives, however, were never serious about complying with the agreement, the lawsuit contends. An employee charged with rewriting policies and procedures to comply with the agreement called the reform effort “a joke,” the lawsuit says. Fourteen months after the settlement, 10 required policies and procedures remained unwritten, the suit alleges.
New policies and procedures that were completed were never fully implemented because employees weren’t properly informed of or trained in them, the suit alleges. The head of banking openly resisted changes, arguing that Higher One was a technology company and therefore exempt from banking rules, according to the suit.
Meantime, as management concealed the company’s growing problems, four executives began selling tens of thousands of shares of company stock, pocketing a total of at least $12.5 million, the suit alleges. They included two of the firm’s founders, Mark Volchek, who walked away with almost $1.9 million, and Miles Lasater, who took home more than $1.1 million, according to the suit.
Joseph Merschman of Wiggin and Dana LLP, the defendants’ attorney, declined comment. Pomerantz LLP, which is representing the plaintiffs, did not return requests for comment.
The timing of the transactions combined with the executives’ quick departure from the firm after cashing out raises serious questions of insider trading, the suit alleges.
In mid-2014, Higher One revealed that the Federal Reserve was seeking to impose penalties so big that the firm would be unable to pay them, causing its stock to crater. The Federal Reserve and the FDIC eventually ordered the firm to return $55 million to 1.3 million customers and pay $4.4 million in fines. Unable to pay the penalties, the last piece of the firm was sold off in 2016.
Also named as defendants in the lawsuit are former CFO Christopher Wolf, ex-Vice President of Finance Jeffrey Wallace, former Director and one time President and CEO Dean Hatton and former Director Patrick McFadden.
Christopher Hoffman can be reached at news@newhavenbiz.com
