Could Anna Delvey Have Gotten Away with It? Bank Vetting for a $22 million Loan
Journal of Regulatory Compliance
Loyola University of Chicago School of Law, JD 2022
Anna Delvey, the alleged scammer who attempted to obtain financial backing of anywhere from $22 million to $40 million in loans, is once again the subject of much debate due to the new Netflix series chronicling her alleged crimes and other actions. The question this article attempts to answer is whether she ever had a chance of realizing her goal of creating an exclusive, members-only, art club much like Soho House. This question hinges on whether she ever had a real chance to secure the funding to make it possible.
Delvey attempted to obtain the necessary funding through Fortress Investment Group (Fortress) and Citibank in the form of a loan. The loans she was applying for were for upwards of $20 million and due to the secrecy and ambiguity of the loan market, it’s difficult to determine whether it would have been possible for her to be approved. Nonetheless, the following is an analysis of what information could be obtained about Fortress and Citibank’s vetting and due diligence processes for obtaining a loan of this size and where Delvey’s attempts failed.
Fortress Investment Group
Based on court filings and testimony, Delvey applied for a $22 million loan from Fortress. After much searching, the following is what Fortress described in a 2006 filing with the Securities and Exchange Commission (SEC) to be their private equity investment approach, which they stated emphasized, “effective control; rigorous financial, legal and operational due diligence; intensive asset management; and aggressive return of capital to reduce risk”. The filing further detailed, albeit vaguely, what they mean by “rigorous financial, legal and operational due diligence”, stating, “our private equity funds approach each investment as a discrete set of assets within a complex corporate capital structure. To evaluate these investments, we employ a rigorous due diligence protocol focused on (i) ‘‘bottom-up’’ financial analysis; (ii) fundamental asset-level valuations; and (iii) legal, structural and operational conditions for controlling and maximizing asset and entity level value.”
Regardless of the true meaning of the jargon Fortress used in their SEC filing, for Delvey, due diligence included her making a good-faith deposit of $100,000 and verification of her alleged funds abroad, estimated to exceed $60 million. Delvey was able to make the deposit, but after failing to connect her alleged “bankers in Zurich” with Fortress, her loan was denied. Allegedly, Delvey deposited fake checks into her Citibank account which allowed her to withdraw $89,000 from Citi before the checks bounced. It is presumed that she used these funds to finance her good-faith deposit with Fortress.
Part of the problem with figuring out whether Delvey had any chance at obtaining the loan from Fortress is that there is little transparency when it comes to commercial loans. The SEC recognized this problem and in a proposed rule put forth in 2022, they attempt to address some of those problems. This proposed rule would require “any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association.” While the SEC argues that this rule would increase competition between securities lenders, in Delvey’s case, the proposed rule would have also required Fortress to register their loan with Delvey, including the terms under which she was granted the loan.
A rule like this would make it more difficult for someone in Delvey’s situation, where it appears her ability to apply for, and seriously be considered for, this sort of loan, was based on the personal opinions of the loan servicer. In this case, the banker managing Delvey’s loan process, Dennis Onabajo’s interest in Delvey’s business and his romantic interest in her, likely helped push her application through certain portions of the vetting process, that she may have otherwise failed. If the terms of these loans, and the requirements in the due diligence and vetting process were more transparent, issues like those that occurred with Delvey’s vetting, might be less likely to occur.
But even that proposed rule doesn’t solve the problem of how to handle the ambiguous process of vetting and due diligence. The American Law Institute offered advice regarding considerations in approaching due diligence which provides certain checklists but emphasizes the need for flexibility and tailoring of the process to each specific set of facts. But the problem remains, without a clearly outlined process for passing the due diligence stage of obtaining a loan like the one Delvey attempted to receive from Fortress, banks still face the danger of falling victim to a scheme like Delvey’s.