securities-law-exposure-memo.docx

1009-00005 · Skybridge Fintech Ltd · Post-Discovery

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CALDERWOOD & HARKNESS LLP Attorneys at Law 425 Lexington Avenue New York, NY 10017 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

May 2, 2024

C&H Matter No. 1009-00005

MEMORANDUM

TO:

Arun Mehta Chief Executive Officer Skybridge Fintech Ltd. 1400 Market Street, Suite 1210 Wilmington, DE 19801

Tomás Reyes General Counsel Skybridge Fintech Ltd. 1400 Market Street, Suite 1210 Wilmington, DE 19801

Marcus Yoon Principal Pinnacle Growth Equity Partners, LP 399 Park Avenue, 28th Floor New York, NY 10022

Catherine Drexler Managing Partner Pinnacle Growth Equity Partners, LP 399 Park Avenue, 28th Floor New York, NY 10022

FROM:

Linda Osei, Partner, Calderwood & Harkness LLP Patrick Gallagher, Associate, Calderwood & Harkness LLP

RE:

Securities-Law Exposure Analysis — Distribution of Preliminary Offering Memorandum Containing Incorrect Static-Pool Performance Data; SkyLend Receivables Trust 2024-1 ($200,000,000 Consumer Receivables Securitization)

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I. Executive Summary

You have asked us to analyze the potential federal securities-law liability exposure arising from the distribution of the Preliminary Offering Memorandum (the "Preliminary OM") dated April 5, 2024, for SkyLend Receivables Trust 2024-1 (the "Trust") to twenty-eight (28) institutional investors during the investor roadshow conducted from April 15 through April 19, 2024. This memorandum sets forth our analysis and conclusions.

As discussed more fully below, the Preliminary OM contained static-pool performance tables and historical delinquency and loss data derived from monthly servicing tapes provided by Clearview Loan Servicing, Inc. ("Clearview"). Those data were subsequently determined to contain material discrepancies, as initially identified by Broadleaf Analytics Group LLC ("Broadleaf") on April 22, 2024, in connection with its independent loan-level due-diligence review.

The key discrepancies are as follows:

• 30+ Day Delinquency Rate (as of March 31, 2024 cut-off date): The Preliminary OM reported a 30+ day delinquency rate of 3.21%. The corrected figure, as determined by Broadleaf and subsequently confirmed by Skybridge Fintech Ltd. ("SBF"), is 5.47%. This represents a discrepancy of 2.26 percentage points, or a 70.4% relative increase over the reported figure.

• Cumulative Net Loss Rate (2022 Origination Vintage): The Preliminary OM reported a cumulative net loss rate for the 2022 origination vintage of 4.12%. The corrected figure is 6.89%. This represents a discrepancy of 2.77 percentage points, or a 67.2% relative increase over the reported figure.

Approximately 14,600 loans — representing 63.2% of the proposed pool of approximately 23,100 loans — were affected by the underlying data error. The root cause has been traced to a system migration undertaken by Clearview in June 2023, from its legacy LoanTrax servicing platform to the ClearCore platform. During the migration, the payment-application waterfall logic was incorrectly configured to apply partial payments to principal before interest, contrary to the contractual waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022 (the "MSA"), which requires application in the order of interest, then fees, then principal. This misapplication caused delinquency and loss figures to appear materially lower than actual performance, because partial payments were credited as reducing outstanding principal rather than being allocated first to accrued interest arrearages.

Overall Assessment. While the dissemination of materially inaccurate performance data in the Preliminary OM raises potentially cognizable securities-law claims — most notably under Section 17(a) of the Securities Act of 1933 — several significant mitigating factors substantially reduce the likelihood of successful enforcement action or private litigation. These mitigating factors include: (i) the Rule 144A private-placement framework under which the offering was structured, which limits both the universe of potential claimants and the available statutory causes of action; (ii) the preliminary nature of the document distributed, which was expressly designated as subject to revision; (iii) the absence of any completed sale of securities, which eliminates the purchase-or-sale prerequisite for private Rule 10b-5 claims and the rescission remedy under Section 12(a)(2); and (iv) the absence of scienter on the part of SBF, which relied in good faith on servicing data provided by a contractually obligated third-party servicer.

In our judgment, the overall securities-law exposure arising from the distribution of the Preliminary OM is low. While the SEC retains theoretical enforcement authority under Section 17(a) of the Securities Act — which reaches offers as well as sales of securities and which requires only negligence under subsections (a)(2) and (a)(3) — the absence of investor harm, the prompt corrective action taken by SBF upon discovery of the discrepancy, and the third-party origin of the data error collectively make SEC pursuit of this matter unlikely under current enforcement priorities.

This memorandum is organized as follows: Section II provides the detailed factual background; Section III analyzes exposure under Rule 10b-5 of the Securities Exchange Act of 1934; Section IV analyzes exposure under Section 12(a)(2) of the Securities Act of 1933; Section V analyzes exposure under Section 17(a) of the Securities Act of 1933; Section VI addresses additional regulatory and liability considerations, including Regulation AB, state securities laws, potential common-law claims, Halcyon Securities LLC's potential claims, and officer and director liability; Section VII consolidates the mitigating factors; and Section VIII sets forth recommended remediation and protective steps.

II. Factual Background

A. The Proposed Transaction

SkyLend Receivables Trust 2024-1 (the "Trust") is a Delaware statutory trust formed on February 14, 2024, under a Trust Agreement between SkyLend Funding LLC, as depositor, and Hollowell Financial, as owner trustee. The Trust was assigned Employer Identification Number 93-4201855. It was established for the purpose of issuing asset-backed notes secured by a pool of unsecured consumer installment-loan receivables originated by SBF through its SkyLend digital lending platform.

The proposed capital structure of the offering was as follows:

The Class A Notes and Class B Notes were to be offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933 (relying on the Section 4(a)(2) exemption from registration) and Regulation S for sales to non-U.S. persons. The offering was directed exclusively to qualified institutional buyers ("QIBs") as defined in Rule 144A. The $8,000,000 residual interest was to be retained by SBF through its wholly owned subsidiary, SkyLend Funding LLC, in satisfaction of the risk-retention requirements applicable to the securitization.

Halcyon Securities LLC ("Halcyon") was engaged to serve as the sole bookrunning manager and initial purchaser under a Purchase and Placement Agreement (the "PPA") executed on March 20, 2024, between the Trust, SkyLend Funding LLC, SBF, and Halcyon. The deal was assigned Halcyon internal reference number HLC-ABS-2024-017. CUSIP prefix 87165Q was allocated to the Trust's securities by the CUSIP Service Bureau but was never activated or assigned to specific classes, as the offering never progressed to the pricing stage.

The consumer receivables comprising the proposed collateral pool were originated by SBF through its SkyLend platform, which provides unsecured consumer installment loans to borrowers across forty-seven states and the District of Columbia. SBF's origination program uses a proprietary credit-scoring algorithm supplemented by traditional underwriting criteria. Clearview Loan Servicing, Inc. ("Clearview") has served as the primary third-party servicer for SBF-originated receivables since October 2022 under the terms of the MSA. SBF also retained a backup servicing arrangement with Veltara Financial Services LLC, although that arrangement is not material to the issues addressed in this memorandum.

B. The Preliminary Offering Memorandum

The Preliminary OM was dated April 5, 2024. It was prepared by this firm, serving as issuer's counsel, in coordination with SBF's management team and Halcyon Securities. The document was drafted and circulated in accordance with customary market practice for Rule 144A asset-backed securities offerings and was reviewed by counsel for Halcyon (Whitfield, Drummond & Paige LLP) prior to distribution.

The Preliminary OM contained detailed descriptions of the proposed collateral pool, including the following aggregate pool characteristics as of the March 31, 2024, statistical cut-off date:

• Number of loans: Approximately 23,100

• Aggregate outstanding principal balance (gross): $213,750,000 (prior to final pool selection to arrive at the targeted $200,000,000 closing pool balance)

• Weighted-average coupon ("WAC"): 14.82%

• Weighted-average remaining term: 38.4 months

• Weighted-average FICO score at origination: 698

The Preliminary OM also included detailed static-pool performance tables and historical delinquency and loss data for SBF's prior origination vintages (2021 and 2022), as well as for the receivables proposed for inclusion in the Trust pool. These performance tables were sourced from the monthly servicing tapes provided by Clearview Loan Servicing, Inc. under Servicing Account No. CLS-SBF-2022-0041. Clearview delivered servicing data to SBF in standard SFIG/industry-format electronic files on a monthly basis, with the most recent tape — covering the period ending March 31, 2024 — delivered to SBF on April 3, 2024. This tape formed the basis for the performance metrics reported in the Preliminary OM.

The key performance metrics reported in the Preliminary OM, and which are the subject of this memorandum, were as follows:

• 30+ day delinquency rate: 3.21% of aggregate outstanding principal balance as of the March 31, 2024 cut-off date

• Cumulative net loss rate (2022 origination vintage): 4.12% of original pool balance for the 2022 origination vintage, measured from origination through March 31, 2024

These metrics were central to three critical components of the transaction structure and marketing:

(i) Rating-agency analyses. Meridian Credit Ratings, Inc. ("Meridian"), with Gregory Fontaine serving as lead analyst, and Carrollton Ratings Group LLC ("Carrollton"), with Teresa Kobayashi serving as lead analyst, each relied on the static-pool performance data in formulating their preliminary ratings of the Class A and Class B Notes. The loss assumptions and stress scenarios used by both agencies were calibrated in part based on the historical delinquency and loss experience reported in the Preliminary OM.

(ii) Credit-enhancement structure. The credit-enhancement levels were sized with reference to the reported pool performance. The proposed structure included overcollateralization of 3.5% (equivalent to $7,000,000 at closing), a funded reserve account of 1.00% (equivalent to $2,000,000), and estimated excess spread of 2.85% per annum. These levels were designed to support the target ratings in light of the reported 30+ day delinquency rate of 3.21% and cumulative net loss rate of 4.12% for the 2022 vintage.

(iii) Investor marketing narrative. The roadshow presentation and marketing materials emphasized the strong credit performance of SBF's origination vintages, with the 30+ day delinquency rate and cumulative net loss figures prominently featured as indicators of underwriting quality and servicing discipline. These metrics were discussed in detail during the investor meetings conducted from April 15 through April 19, 2024.

The Preliminary OM contained customary disclaimers consistent with market practice for preliminary offering documents in Rule 144A securitization transactions. These included express statements that the information contained therein was preliminary and subject to change, that the final terms of the offering would be set forth in a final offering memorandum, and that the Preliminary OM did not constitute an offer to sell or a solicitation of an offer to buy in any jurisdiction where such an offer or solicitation would be unlawful.

C. Distribution to Investors

The Preliminary OM was distributed to twenty-eight (28) institutional investors during a five-day investor roadshow conducted from April 15 through April 19, 2024. The roadshow was managed by Halcyon Securities, with Rebecca Thornton, Managing Director, and Jonathan Kramer, Head of ABS Origination, serving as the primary points of contact for Halcyon. SBF was represented at roadshow presentations by Arun Mehta (CEO) and Danielle Prescott (Chief Financial Officer).

All twenty-eight recipients of the Preliminary OM were qualified institutional buyers as defined in Rule 144A(a)(1) under the Securities Act. Distribution was effected electronically via Halcyon's secure investor portal (Thackeray Solutions virtual data room, Project Name: "Skylark"), with physical copies available upon request. We understand from Halcyon that no physical copies were distributed.

During the roadshow period, Halcyon and SBF conducted in-person and video-conference meetings with a subset of the investor recipients, during which SBF management discussed the SkyLend platform's origination strategy, credit performance, and servicing arrangements. The static-pool performance data from the Preliminary OM was presented and discussed during these meetings.

No binding commitments to purchase the Notes were received during or after the roadshow. No indications of interest were formalized in writing. The transaction remained in the marketing phase at all relevant times. Specifically, no pricing term sheet was circulated, no allocation was made, no trade confirmations were issued, and no settlement instructions were exchanged. No securities were sold, issued, or delivered. The transaction was pre-pricing at the time of termination of the marketing process.

D. Discovery of the Discrepancy

Broadleaf Analytics Group LLC ("Broadleaf"), a specialty ABS due-diligence firm, was engaged by Halcyon Securities on March 25, 2024, to perform independent loan-level due diligence and re-underwriting on a stratified random sample of the proposed collateral pool. Broadleaf's engagement, managed by Sanjay Rajan, Managing Director, covered a sample of approximately 1,500 loans, representing approximately 6.5% of the total pool by loan count. The sample was stratified by origination vintage, loan size, FICO band, and geographic concentration to ensure statistical representativeness.

Broadleaf's scope of work included re-verification of loan-level data fields, compliance testing, re-underwriting of a subsample, and — critically — independent reconciliation of payment histories against the servicing data reflected in Clearview's monthly tapes.

On April 22, 2024, Broadleaf communicated its preliminary findings to Halcyon Securities and, through Halcyon, to SBF and this firm. Broadleaf identified that the servicing-data tapes provided by Clearview for the SBF portfolio applied a payment-application waterfall that was inconsistent with the contractual waterfall specified in Section 4.03 of the MSA. Under Section 4.03 of the MSA, partial payments received from borrowers are to be applied in the following order: (1) accrued interest, (2) fees, and (3) outstanding principal. However, Clearview's ClearCore servicing system was applying partial payments in the following order: (1) outstanding principal, (2) accrued interest, (3) fees.

This misapplication of the payment waterfall had the effect of causing the servicing data to report artificially low delinquency and loss figures. By applying partial payments first to principal, ClearCore reduced the outstanding principal balance of affected loans, which in turn reduced the denominator against which delinquency and loss metrics were calculated, and also masked the extent of interest arrearages that should have been reflected in the delinquency classification of the affected accounts. In practical terms, borrowers who were making partial payments were being classified as current or less delinquent than they actually were, because the principal-first application caused the system to treat those borrowers as having satisfied a greater proportion of their scheduled payment obligations than was actually the case under the contractual terms.

The corrected metrics, as determined by Broadleaf and subsequently validated by SBF's internal data team, were as follows:

Approximately 14,600 loans were affected by the waterfall error, representing 63.2% of the approximately 23,100 loans in the proposed pool. The pervasive nature of the error reflects the fact that the ClearCore migration affected all loans that Clearview was servicing on SBF's behalf as of the June 2023 migration date, with the exception of a small number of loans that had been fully paid or charged off prior to that date.

The root cause of the error was Clearview's system migration from the LoanTrax platform to the ClearCore platform in June 2023. During the migration, the payment-waterfall logic in ClearCore was configured incorrectly. Clearview's post-migration validation procedures failed to detect the error, apparently because the validation testing focused on data-field mapping and balance reconciliation at the portfolio level rather than on the accuracy of the underlying payment-application logic at the loan level. Similarly, SBF's quarterly data-reconciliation procedures — which compared aggregate portfolio statistics reported by Clearview against SBF's internal origination records — did not detect the discrepancy, because SBF's reconciliation processes compared ending balances and aggregate delinquency classifications rather than independently re-deriving delinquency classifications from loan-level payment history.

E. Subsequent Events

The timeline of events following Broadleaf's discovery of the discrepancy is as follows:

April 23, 2024. Halcyon Securities, through its outside counsel Whitfield, Drummond & Paige LLP ("WDP") and specifically Harrison Whitfield III, formally notified SBF (through this firm) of Broadleaf's findings. The notification identified the payment-waterfall discrepancy as a potential material data integrity issue affecting the accuracy of the Preliminary OM and requested an immediate response from SBF and Clearview.

April 24, 2024. SBF commenced an internal investigation into the scope and impact of the data discrepancy. SBF's internal data team, led by Director of Data Analytics Priya Sundaram, undertook an independent reconstruction of payment histories for a subset of affected loans. Clearview Loan Servicing, through its Chief Executive Officer Warren Pettigrew and Vice President of Operations Meredith Sloane, issued a preliminary written response acknowledging the system migration as the likely source of the error and committing to a full remediation of the ClearCore waterfall logic.

April 26, 2024. Halcyon formally suspended all marketing activities for SkyLend Receivables Trust 2024-1 and delivered a written notice to SBF and the Trust invoking the force-majeure and material-change provisions of the PPA. Halcyon's notice stated that the data discrepancy constituted a material adverse change in the condition of the collateral pool as reported in the Preliminary OM and reserved all rights under the PPA, including the right to terminate the agreement and to seek indemnification for all costs and expenses incurred in connection with the transaction.

April 29, 2024. Carrollton Ratings Group LLC placed its expected ratings for the Class A and Class B Notes on "developing" watch, citing the data integrity concerns and the suspension of marketing activities. Carrollton's watch notice was issued to SBF, Halcyon, and the Trust.

May 1, 2024. Meridian Credit Ratings, Inc. withdrew its preliminary ratings for the Class A and Class B Notes, citing the inability to confirm the accuracy of the static-pool performance data that formed the basis of its credit analysis.

May 3, 2024. The SBF Board of Directors has scheduled a meeting to consider a recommendation from management and outside counsel to formally terminate the SkyLend Receivables Trust 2024-1 transaction. A separate Board Memorandum dated May 3, 2024, has been prepared by this firm setting forth the basis for the termination recommendation.

As of the date of this memorandum, the transaction has not been formally terminated. However, the withdrawal of Meridian's preliminary ratings, Carrollton's placement of its expected ratings on "developing" watch, and Halcyon's suspension of marketing activities have effectively ended any prospect of proceeding with the offering in its current form. Termination is recommended, and we expect the Board to act accordingly at the May 3 meeting.

III. Analysis Under Rule 10b-5 (Securities Exchange Act of 1934)

A. Elements of a Rule 10b-5 Claim

Rule 10b-5, codified at 17 C.F.R. § 240.10b-5 and promulgated by the Securities and Exchange Commission ("SEC") under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), is the principal federal antifraud provision in the securities laws. The rule makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange:

(a) to employ any device, scheme, or artifice to defraud;

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

In a private action under Rule 10b-5, a plaintiff must establish six elements: (1) a material misstatement or omission; (2) scienter (i.e., an intent to deceive, manipulate, or defraud, or, in most circuits, severe recklessness); (3) a connection between the misstatement and the purchase or sale of a security; (4) reliance by the plaintiff on the misstatement; (5) economic loss; and (6) loss causation — i.e., a causal connection between the misstatement and the economic loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).

For SEC enforcement actions, the scienter requirement applies to claims brought under Rule 10b-5(b), which addresses material misstatements and omissions. However, certain circuits have held that the SEC may establish violations of Rule 10b-5(a) and 10b-5(c) — which address scheme liability — upon a showing of negligence in certain circumstances, though the prevailing view is that scienter is required for all subsections. See Aaron v. SEC, 446 U.S. 680 (1980) (holding that scienter is required for SEC enforcement actions under Section 10(b) and Rule 10b-5). Importantly, the SEC is not bound by the Private Securities Litigation Reform Act's heightened pleading standards or the purchase-or-sale requirement that constrains private litigants.

We analyze each of the relevant elements below as applied to the facts of this matter.

B. Material Misstatement or Omission

The static-pool performance data included in the Preliminary OM reported a 30+ day delinquency rate of 3.21% and a cumulative net loss rate for the 2022 origination vintage of 4.12%. Both metrics materially understated the actual performance of the collateral pool. As determined by Broadleaf and confirmed by SBF, the actual 30+ day delinquency rate was 5.47% (70.4% higher than reported), and the actual cumulative net loss rate for the 2022 vintage was 6.89% (67.2% higher than reported).

Delinquency and cumulative net loss performance are among the most critical data points for investors evaluating asset-backed securities. These metrics directly inform investors' expectations regarding the likelihood and severity of credit losses in the collateral pool, which in turn drive pricing, yield requirements, and the adequacy of credit enhancement. A 2.26 percentage point increase in 30+ day delinquency (from 3.21% to 5.47%) and a 2.77 percentage point increase in cumulative net losses (from 4.12% to 6.89%) would substantially alter the credit profile of the proposed Notes and the risk-return calculus for potential investors.

Under the materiality standard established by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), and reaffirmed in Basic Inc. v. Levinson, 485 U.S. 224 (1988), a fact is material if there is a "substantial likelihood that a reasonable [investor] would consider it important" in making an investment decision, or, put differently, if disclosure of the omitted or misstated fact would have "significantly altered the 'total mix' of information" available to the investor. Applied here, the corrected data would likely have led to materially different conclusions regarding the expected loss severity of the proposed pool, the adequacy of the credit-enhancement structure, and the appropriate pricing of the Notes. In particular:

• The corrected delinquency rate of 5.47% represents a qualitatively different credit profile than the reported rate of 3.21%. In consumer ABS markets, a 30+ day delinquency rate of 3.21% is consistent with a well-performing pool and supports investment-grade ratings at the proposed credit-enhancement levels. A rate of 5.47%, by contrast, would raise significant concerns about the performance trajectory of the pool and would likely require substantially higher credit-enhancement levels to support the same ratings.

• The corrected cumulative net loss rate of 6.89% for the 2022 vintage is nearly 68% higher than the reported rate of 4.12%. This magnitude of increase would likely cause the rating agencies to revise their loss assumptions upward, which in turn would require either higher credit enhancement, lower ratings, wider pricing spreads, or some combination thereof.

• The discrepancy affected 63.2% of the proposed pool, making it pervasive rather than isolated. An error affecting a small subset of loans might be viewed differently, but one affecting nearly two-thirds of the pool undermines the reliability of the reported performance data as a whole.

We conclude that the discrepancies in the static-pool performance data would likely be deemed material under the TSC Industries / Basic standard. We do not believe this element would be a viable defense for SBF in any forum.

C. Scienter

Rule 10b-5 requires a showing of scienter — that is, "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Most federal circuits, including the Second Circuit, also permit Rule 10b-5 liability based on a showing of "severe recklessness," defined as "an extreme departure from the standards of ordinary care" that presents "a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." See Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000); South Cherry Street, LLC v. Hennessee Group LLC, 573 F.3d 98, 109 (2d Cir. 2009).

The facts of this matter present a weak case for scienter on the part of SBF, its officers, or its directors. The following considerations are dispositive:

Origin of the error. The misstatement in the Preliminary OM originated with Clearview Loan Servicing, Inc., an independent third-party servicer. The incorrect payment-waterfall logic in Clearview's ClearCore system was introduced during Clearview's own internal system migration in June 2023. There is no evidence that any SBF personnel participated in, directed, or were aware of the system migration or the resulting error in the payment-application logic. SBF received monthly servicing tapes from Clearview in the ordinary course and included the data from those tapes in the Preliminary OM in good-faith reliance on Clearview's contractual obligation to provide accurate data.

SBF's reliance on Clearview. Under Section 5.01 of the MSA, Clearview represented and warranted that all servicing data delivered to SBF would be "true, correct, and complete in all material respects" and would be "prepared and delivered in accordance with the Servicing Standards and applicable law." SBF's reliance on these representations in a two-year servicing relationship, in which Clearview had consistently delivered servicing data without prior incident, does not constitute the type of extreme departure from ordinary care that gives rise to severe recklessness. Courts have consistently held that reliance on representations from a contractually obligated counterparty does not, without more, establish recklessness. See, e.g., In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 662 (S.D.N.Y. 2004) (distinguishing between reliance on internally generated data and reliance on data provided by third parties).

SBF's quarterly reconciliation. SBF conducted quarterly data-reconciliation procedures as part of its portfolio-management activities. These procedures compared aggregate portfolio statistics reported by Clearview — including ending balances, payment rates, and aggregate delinquency classifications — against SBF's internal origination records. The reconciliation procedures did not, however, include independent re-derivation of delinquency classifications from loan-level payment histories, which would have been necessary to detect the ClearCore waterfall error. While this represents a gap in SBF's verification procedures, the failure to conduct more granular verification does not, in our view, rise to the level of severe recklessness. The quarterly reconciliation was consistent with industry practice for originators that outsource servicing to third-party servicers, and there were no red flags — such as material reconciliation exceptions, servicing complaints, or anomalous performance trends — that should have prompted deeper investigation.

Absence of red flags. The strongest argument against SBF on the scienter element would be a recklessness theory based on SBF's failure to independently verify Clearview's data following the June 2023 system migration. However, this argument faces substantial hurdles. SBF was aware that Clearview undertook a system migration in June 2023, as Clearview provided advance notice of the migration as required under Section 7.04 of the MSA. However, Clearview also represented to SBF that the migration had been completed successfully and that post-migration validation testing had confirmed data integrity. SBF received no indication — from Clearview, from its own reconciliation procedures, from warehouse lenders, or from any other source — that the ClearCore system was applying payments in an incorrect order. The absence of any such red flag prior to Broadleaf's discovery on April 22, 2024, significantly undermines any argument that SBF acted with severe recklessness.

Clearview's scienter. The question of whether Clearview itself possessed scienter — i.e., whether Clearview knew or was severely reckless in not knowing that the ClearCore payment waterfall was incorrectly configured — is a separate question that does not directly bear on SBF's liability. Even if Clearview acted with scienter (a question we do not address in this memorandum), that scienter would not automatically be imputed to SBF. Clearview is an independent contractor, not an agent of SBF, and its knowledge is not attributable to SBF under general principles of imputation. See Restatement (Third) of Agency § 5.03 (2006); see also Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (scienter of third-party accountant not imputed to issuer absent showing that issuer knew of or recklessly disregarded the accountant's errors).

Assessment. SBF likely lacks scienter for Rule 10b-5 purposes. The strongest argument against SBF would be a recklessness theory premised on the failure to implement more rigorous verification procedures following the June 2023 system migration, but this argument faces substantial hurdles given the absence of red flags, SBF's good-faith reliance on Clearview's contractual representations, and the industry-standard nature of SBF's reconciliation procedures. We assess the probability that a court or the SEC could establish scienter against SBF as low.

D. "In Connection With the Purchase or Sale of a Security"

Rule 10b-5 requires that the misstatement or omission be made "in connection with the purchase or sale of any security." In a private action, this requirement incorporates the standing limitation established by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), which holds that only actual purchasers or sellers of securities have standing to bring a private action under Rule 10b-5. Persons who merely contemplated a purchase or were solicited but did not consummate a transaction — so-called "frustrated buyers" — lack standing.

Here, the Notes contemplated by the SkyLend Receivables Trust 2024-1 transaction were never priced, sold, issued, or settled. No institutional investor purchased any security in connection with the offering. The transaction was in the marketing phase — specifically, the preliminary roadshow — at the time the data discrepancy was discovered, and all marketing activities were suspended on April 26, 2024. No indications of interest were formalized, and no allocations were made. Accordingly, none of the twenty-eight institutional investors that received the Preliminary OM qualifies as a "purchaser" with standing to bring a private Rule 10b-5 claim.

We note, however, that the Blue Chip Stamps purchase-or-sale requirement applies only to private actions. The SEC's enforcement authority is not limited by this standing requirement. The SEC has brought enforcement actions in circumstances where misstatements were made "in connection with" an offering of securities even though no sale was ultimately consummated. See SEC v. Zandford, 535 U.S. 813 (2002) (broadly interpreting "in connection with"); SEC v. Pirate Investor LLC, 580 F.3d 233, 239 (4th Cir. 2009) (the "in connection with" requirement is satisfied when the fraud and the securities transaction "coincide"). The distribution of the Preliminary OM to twenty-eight institutional investors as part of a formal roadshow in connection with the proposed offering of the Notes would likely satisfy the "in connection with" requirement for SEC enforcement purposes, even though no sale was completed.

Assessment. The absence of a completed purchase or sale of securities is a critical bar to any private Rule 10b-5 claim. No institutional investor has standing under Blue Chip Stamps. For SEC enforcement purposes, the "in connection with" requirement would likely be met, but the absence of a completed sale nevertheless significantly reduces the likelihood that the SEC would devote enforcement resources to this matter, as discussed further in Section VII.

E. Reliance and Loss Causation

Because no securities were sold in connection with the offering, the reliance and loss-causation elements of a private Rule 10b-5 claim cannot be established by any potential plaintiff.

Reliance. A private Rule 10b-5 plaintiff must demonstrate reliance on the defendant's misstatement or omission. See Basic Inc. v. Levinson, 485 U.S. 224 (1988). In the context of a primary-market offering of asset-backed securities to a limited number of institutional investors (as opposed to a secondary-market trading claim where the fraud-on-the-market presumption might apply), reliance would need to be established on a transaction-specific basis. Because no investor consummated a purchase, no investor can demonstrate that it relied on the Preliminary OM in making an investment decision — there was no investment decision to rely upon.

Loss causation. A private plaintiff must also establish loss causation — a causal connection between the misstatement and the plaintiff's economic loss. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). Here, no investor suffered any economic loss. No capital was committed, no funds were disbursed, and no securities were acquired that subsequently declined in value. The absence of economic loss eliminates both the loss-causation element and the damages component of any private claim.

Assessment. The inability to establish reliance or loss causation is fatal to any private Rule 10b-5 claim. These elements are not required for SEC enforcement actions, but the absence of investor harm is a significant factor that the SEC considers in exercising its enforcement discretion.

F. Summary — Rule 10b-5

Based on the foregoing analysis, we assess the Rule 10b-5 exposure as follows:

• Private litigation risk: Low. No purchase or sale of securities occurred; no investor has standing under Blue Chip Stamps; no economic loss to any investor; reliance and loss causation cannot be established. Scienter is likely absent. Private Rule 10b-5 claims arising from the Preliminary OM are, in our judgment, not viable.

• SEC enforcement risk: Low to moderate. The SEC is not bound by the purchase-or-sale standing requirement and could theoretically pursue an enforcement action based on the distribution of materially inaccurate information in the Preliminary OM. However, SBF's lack of scienter, the immediate corrective action taken upon discovery of the discrepancy, the private-placement context, and the absence of any investor harm significantly reduce the likelihood that the SEC would pursue this matter. We note that the SEC's Enforcement Division has historically focused its limited resources on cases involving completed transactions, investor harm, and evidence of intentional or reckless misconduct, none of which are present here.

IV. Analysis Under Securities Act § 12(a)(2)

A. Statutory Framework

Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2), imposes liability on any person who "offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." The provision creates a private right of action for the purchaser of the security against the statutory "seller."

Several features of Section 12(a)(2) distinguish it from Rule 10b-5:

• No scienter requirement. Section 12(a)(2) imposes liability without regard to the defendant's intent; the applicable standard is negligence, not fraud. However, the statute provides an affirmative defense: the defendant is not liable if it can demonstrate that it "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission" (the "reasonable-care defense").

• Statutory seller requirement. Liability extends to "any person" who "offers or sells" the security by means of the defective prospectus or communication. The Supreme Court has interpreted "seller" in this context to include not only persons who pass title to the security but also persons who "solicit" the purchase, motivated at least in part by a desire to serve their own financial interests. Pinter v. Dahl, 486 U.S. 622, 647 (1988).

• Remedy. Section 12(a)(2) provides a rescission remedy — the purchaser may recover the consideration paid for the security, with interest, less any income received. If the purchaser no longer holds the security, the remedy is damages (the difference between the purchase price and the disposition price).

B. Applicability to Rule 144A Offerings

The threshold question under Section 12(a)(2) is whether the provision applies to a Rule 144A private-placement offering in which the distributed document is a preliminary offering memorandum rather than a registered prospectus.

In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Supreme Court held that the term "prospectus" as used in Section 12(a)(2) refers to the document described in Section 10 of the Securities Act — i.e., a prospectus that is required to be filed as part of a Securities Act registration statement. The Court reasoned that applying Section 12(a)(2) to private and secondary transactions would extend the provision "beyond its intended reach" and would render other provisions of the Securities Act superfluous. Under Gustafson, Section 12(a)(2) is limited to public offerings of securities pursuant to a registration statement filed under the Securities Act.

In a Rule 144A private placement, the offering memorandum is not a "prospectus" within the meaning of Section 10 of the Securities Act. The offering is not conducted pursuant to a registration statement; rather, it relies on the exemption from registration provided by Section 4(a)(2) of the Securities Act, with Rule 144A establishing a non-exclusive safe harbor for resales of securities to QIBs. The Preliminary OM distributed to the twenty-eight institutional investors in this case was expressly identified as a preliminary offering memorandum for a Rule 144A placement, not as a statutory prospectus.

Substantial authority supports the position that Section 12(a)(2) does not apply to Rule 144A offerings distributed exclusively to QIBs. See, e.g., Yung v. Lee, 432 F.3d 142, 149 (2d Cir. 2005) (reaffirming Gustafson's limitation of Section 12(a)(2) to public offerings); In re Lehman Brothers Mortgage-Backed Securities Litigation, 650 F.3d 167 (2d Cir. 2011) (analyzing the scope of "prospectus" under Gustafson). The weight of authority in the Second Circuit — the jurisdiction most likely to have nexus over claims arising from this transaction — is firmly in favor of this limitation.

Assessment. Section 12(a)(2) claims arising from the Preliminary OM are likely precluded as a matter of law because the offering was structured as a Rule 144A private placement and the Preliminary OM is not a statutory prospectus under Section 10 of the Securities Act. We view this as a strong threshold defense that would likely be dispositive on a motion to dismiss.

C. Even If Section 12(a)(2) Applied

Even assuming, arguendo, that a court were to find Section 12(a)(2) applicable to the distribution of the Preliminary OM, SBF would have additional defenses:

Material misstatement. The materiality analysis is the same as under Rule 10b-5. As discussed in Section III.B, the discrepancies in the static-pool performance data would likely be deemed material. This element would not provide a viable defense.

Reasonable-care defense. Unlike Rule 10b-5, Section 12(a)(2) affords the defendant the opportunity to establish that it "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." SBF would have a reasonable basis for asserting this defense, grounded in the following considerations:

(i) SBF relied on Clearview, a reputable third-party servicer with a two-year track record of servicing SBF's portfolio, which was contractually obligated under the MSA to provide accurate servicing data;

(ii) SBF maintained quarterly data-reconciliation procedures consistent with industry practice for originators that outsource servicing;

(iii) SBF's independent auditor, Rowland & Cross LLP, audited SBF's financial statements for the fiscal year ended December 31, 2023, without qualification, and did not identify the ClearCore waterfall error;

(iv) SBF cooperated fully with Halcyon's engagement of Broadleaf Analytics Group LLC to perform independent loan-level due diligence; and

(v) No red flags or anomalous performance trends were observed that should have prompted SBF to undertake more granular verification of Clearview's servicing data prior to Broadleaf's discovery.

While the reasonable-care defense is fact-intensive and cannot be resolved with certainty at this stage, we believe SBF has a credible basis for invoking it.

No sale occurred. Even if Section 12(a)(2) were applicable and the reasonable-care defense were to fail, the absence of a completed sale of securities eliminates the operative remedy. The rescission remedy under Section 12(a)(2) requires an actual sale — the purchaser's right is to "recover the consideration paid for such security with interest thereon." 15 U.S.C. § 77l(a)(2). Here, no consideration was paid by any investor, no securities were delivered, and there is nothing to rescind. In the absence of a completed sale, the damages measure under Section 12(a)(2) (applicable where the security has been disposed of) is likewise inapplicable. Accordingly, even in the unlikely event that a court found Section 12(a)(2) applicable and rejected the reasonable-care defense, no remedy would be available to any plaintiff.

D. Summary — Section 12(a)(2)

Exposure: Very Low. The statutory framework of Section 12(a)(2) is likely inapplicable to the Rule 144A offering at issue under Gustafson. Even if applicable, the reasonable-care defense provides a credible basis for avoiding liability. Most fundamentally, no sale occurred, eliminating the rescission remedy and any available damages measure. The combination of these factors makes Section 12(a)(2) exposure de minimis.

V. Analysis Under Securities Act § 17(a)

A. Statutory Framework

Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), provides that it shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement, by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:

(1) to employ any device, scheme, or artifice to defraud;

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Section 17(a) is exclusively an enforcement provision. The Supreme Court has not recognized a private right of action under Section 17(a), and the lower federal courts have overwhelmingly held that no such right exists. See, e.g., Maldonado v. Dominguez, 137 F.3d 1, 7 (1st Cir. 1998); Finkel v. Stratton Corp., 962 F.2d 169, 174 (2d Cir. 1992).

The scienter requirements under Section 17(a) vary by subsection. In Aaron v. SEC, 446 U.S. 680 (1980), the Supreme Court held that:

• Section 17(a)(1) requires a showing of scienter (intent to defraud or severe recklessness), consistent with the standard applicable under Rule 10b-5;

• Sections 17(a)(2) and 17(a)(3) require only a showing of negligence.

This is a critical distinction. The lower scienter threshold for Sections 17(a)(2) and 17(a)(3) means that the SEC could potentially pursue an enforcement action against SBF under these subsections based on a negligence theory, even if the SEC could not establish the scienter required for Section 17(a)(1) or Rule 10b-5.

Additionally, and of particular relevance to this matter, Section 17(a) applies to conduct "in the offer or sale" of securities. The term "offer" is defined broadly in Section 2(a)(3) of the Securities Act to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." This is broader than the "in connection with the purchase or sale" language of Rule 10b-5 and Section 10(b), which — for private actions — requires an actual purchase or sale under Blue Chip Stamps. The distribution of the Preliminary OM to twenty-eight institutional investors as part of a formal roadshow in connection with the proposed offering of the Notes would constitute an "offer" within the meaning of Section 17(a), even though no sale was consummated.

B. Application to the Preliminary OM Distribution

The distribution of the Preliminary OM and the conduct of the roadshow presentations constitute offers of the Class A and Class B Notes within the meaning of Section 17(a). The roadshow was a solicitation of offers to purchase the Notes, conducted in interstate commerce through electronic distribution of the Preliminary OM and through in-person and video-conference presentations. These activities fall squarely within the "in the offer" language of Section 17(a).

Under this framework, the analysis of potential Section 17(a) liability proceeds as follows:

Section 17(a)(1) — scheme to defraud. Section 17(a)(1) requires scienter. For the reasons discussed in Section III.C above, SBF likely lacks the requisite scienter. No evidence suggests that SBF employed any device, scheme, or artifice to defraud the roadshow investors. The misstatement in the Preliminary OM resulted from SBF's good-faith reliance on erroneous servicing data from Clearview, not from any intentional or reckless effort by SBF to deceive potential investors.

Section 17(a)(2) — material misstatement for the purpose of obtaining money or property. Section 17(a)(2) requires only negligence but includes the additional element that the defendant must "obtain money or property" by means of the untrue statement. SBF's failure to independently verify Clearview's servicing data before including it in the Preliminary OM could arguably satisfy the negligence standard — a reasonable issuer in SBF's position might have undertaken more rigorous verification of the data underlying its offering document, particularly following Clearview's system migration in June 2023. However, SBF did not "obtain money or property" through the misstatements in the Preliminary OM. No investor purchased any securities, and no proceeds were received by SBF, the Trust, or any other party. While some courts have interpreted "obtain money or property" broadly in the context of Ponzi schemes and other ongoing frauds, the absence of any monetary exchange in this case presents a significant obstacle to a Section 17(a)(2) claim. See SEC v. Zandford, 535 U.S. 813 (2002) (analyzing the "obtain money or property" element in the context of a completed transaction).

Section 17(a)(3) — fraudulent course of business. Section 17(a)(3) requires only negligence and does not contain the "obtain money or property" requirement of Section 17(a)(2). It prohibits engaging in any "transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." The distribution of a Preliminary OM containing materially inaccurate static-pool performance data to twenty-eight institutional investors as part of a formal roadshow could be characterized as a practice that "operates . . . as a fraud or deceit" upon potential purchasers, even in the absence of a completed sale. The negligence standard is more readily satisfied than scienter: SBF's failure to independently verify Clearview's data, combined with the pervasive nature of the error (affecting 63.2% of the pool), could support a finding of negligence under Section 17(a)(3).

However, several factors significantly mitigate the risk that the SEC would pursue a Section 17(a)(3) claim in these circumstances:

• No investor harm. No investor suffered any economic loss. No securities were sold, and no capital was committed. The absence of investor harm is a critical factor in the SEC's exercise of enforcement discretion.

• Prompt corrective action. SBF took immediate corrective action upon learning of the discrepancy, commencing an internal investigation within one day and cooperating fully with Halcyon's suspension of marketing activities. The SEC has consistently recognized prompt corrective action as a mitigating factor in enforcement decisions. See SEC Enforcement Manual § 6.1 (Factors Considered in Exercising Prosecutorial Discretion).

• Preliminary nature of the document. The document was expressly designated as a "Preliminary" Offering Memorandum, subject to change, and accompanied by customary disclaimers. No final offering memorandum was ever produced or distributed.

• Private-placement context. The offering was directed exclusively to sophisticated institutional investors (QIBs) in a Rule 144A private placement, not to retail investors. The SEC's enforcement priorities generally focus on cases involving harm to less sophisticated investors or to the public markets.

• Third-party origin of the error. The misstatement originated with Clearview, an independent third-party servicer, and was not generated or manipulated by SBF.

Assessment. Section 17(a) presents the most plausible basis for SEC enforcement exposure among the statutory provisions analyzed in this memorandum. Unlike Rule 10b-5, Section 17(a) reaches "offers" of securities (not just purchases or sales), meaning the absence of a completed sale does not preclude a Section 17(a) claim. And unlike Section 12(a)(2), Section 17(a) is not limited by Gustafson's restriction to public offerings. Moreover, Sections 17(a)(2) and 17(a)(3) require only negligence, a lower bar than the scienter required for Rule 10b-5. Nevertheless, the absence of any investor harm, the immediate corrective action taken by SBF, the preliminary nature of the OM, the private-placement context, and the third-party origin of the data error collectively make SEC pursuit of a Section 17(a) claim against SBF unlikely under current enforcement priorities.

C. Summary — Section 17(a)

• Private litigation risk: None. There is no private right of action under Section 17(a).

• SEC enforcement risk: Low to moderate. Section 17(a) has broader reach than Rule 10b-5 in terms of both the "offer" versus "sale" language and the lower scienter threshold for subsections (a)(2) and (a)(3). These features make Section 17(a) the most plausible basis for SEC action. However, the risk is substantially mitigated by the absence of investor harm, the prompt corrective action, the preliminary nature of the document, the private-placement framework, and the third-party origin of the error. We assess the overall probability that the SEC would bring a Section 17(a) enforcement action against SBF as low.

VI. Additional Regulatory and Liability Considerations

A. Regulation AB and SEC Reporting

Regulation AB, codified at 17 C.F.R. §§ 229.1100 through 229.1125, establishes the SEC's comprehensive disclosure framework for registered offerings of asset-backed securities. Regulation AB prescribes detailed requirements for the disclosure of pool-level and loan-level data, static-pool performance information, servicing arrangements, and related matters in registration statements and prospectuses for registered ABS offerings.

The SkyLend Receivables Trust 2024-1 offering was structured as a Rule 144A private placement, not as a registered offering under the Securities Act. Accordingly, the full disclosure regime of Regulation AB — including the loan-level data requirements of Rule 193 and Item 1111 of Regulation AB — does not apply by its terms to this transaction. The Preliminary OM was prepared in accordance with market practice for Rule 144A ABS offerings, not in compliance with Regulation AB.

We note, however, that the SEC has in certain instances taken the position that Rule 144A ABS offerings that subsequently contemplate resale registration — for example, through an A/B exchange offer pursuant to a registration-rights agreement — may trigger retrospective Regulation AB-type disclosure obligations when the exchange offer registration statement is filed. In such cases, the SEC staff has indicated that the disclosure provided to Rule 144A purchasers should be consistent with the disclosure that would be required in a registered offering.

This concern is not present here. The SkyLend Receivables Trust 2024-1 transaction did not contemplate an A/B exchange offer or any other form of subsequent registration. The Notes were intended to remain in Rule 144A form for the life of the securities. Accordingly, Regulation AB does not create independent disclosure obligations or independent exposure in this context.

Assessment. Regulation AB does not apply to this transaction and does not create independent exposure. No Regulation AB-related disclosure deficiency exists.

B. State Securities Laws (Blue Sky)

State securities laws — commonly known as "Blue Sky" laws — include both registration requirements and antifraud provisions. The interplay between state securities laws and the federal Rule 144A framework is governed by the National Securities Markets Improvement Act of 1996 ("NSMIA"), 15 U.S.C. § 77r, which preempts state registration requirements for "covered securities." Securities sold in transactions exempt from registration under Rule 144A to QIBs constitute "covered securities" within the meaning of NSMIA, and state registration requirements are therefore preempted.

NSMIA does not, however, preempt state antifraud provisions. States retain authority to enforce their antifraud statutes in connection with the offer or sale of securities within their borders, even for covered securities. See 15 U.S.C. § 77r(c)(1).

In practical terms, the analysis of potential exposure under state antifraud provisions mirrors the federal analysis. The key considerations are the same: no securities were sold, no investors suffered economic losses, and SBF lacked scienter. State antifraud statutes generally require either intentional fraud, negligent misrepresentation, or — in some states — strict liability, but all require some form of completed transaction or quantifiable harm for the imposition of damages. The absence of a completed sale and the absence of investor harm are equally dispositive under state antifraud provisions as they are under the federal securities laws.

Additionally, the twenty-eight institutional investor recipients are sophisticated QIBs, many of which are themselves regulated entities (e.g., insurance companies, registered investment companies, and bank-affiliated entities). State regulators are unlikely to pursue enforcement actions on behalf of such investors in the absence of actual harm.

Assessment. The incremental exposure from state securities laws is minimal. State registration requirements are preempted by NSMIA for Rule 144A offerings. State antifraud provisions are not preempted, but the same factors that mitigate federal exposure — no sale, no investor loss, no scienter — apply with equal force under state law.

C. Potential Investor Claims (Fraud / Negligent Misrepresentation Under State Common Law)

In the absence of a securities sale, the twenty-eight institutional investors that received the Preliminary OM could theoretically assert state common-law claims for negligent misrepresentation — or, in some jurisdictions, fraud or promissory estoppel — based on the materially inaccurate performance data contained in the Preliminary OM. Such claims would be asserted outside the federal securities-law framework and would be governed by the common law of the relevant state (likely Delaware or New York).

To prevail on a claim for negligent misrepresentation under New York law, for example, a plaintiff must establish: (i) that the defendant had a duty, as a result of a special relationship, to give correct information; (ii) that the defendant made a false representation that it should have known was incorrect; (iii) that the information supplied was known to be desired by the plaintiff for a seriou

CALDERWOOD & HARKNESS LLP Attorneys at Law 425 Lexington Avenue New York, NY 10017 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
May 2, 2024
C&H Matter No. 1009-00005
MEMORANDUM
TO:
Arun Mehta Chief Executive Officer Skybridge Fintech Ltd. 1400 Market Street, Suite 1210 Wilmington, DE 19801
Tomás Reyes General Counsel Skybridge Fintech Ltd. 1400 Market Street, Suite 1210 Wilmington, DE 19801
Marcus Yoon Principal Pinnacle Growth Equity Partners, LP 399 Park Avenue, 28th Floor New York, NY 10022
Catherine Drexler Managing Partner Pinnacle Growth Equity Partners, LP 399 Park Avenue, 28th Floor New York, NY 10022
FROM:
Linda Osei, Partner, Calderwood & Harkness LLP Patrick Gallagher, Associate, Calderwood & Harkness LLP
RE:
Securities-Law Exposure Analysis — Distribution of Preliminary Offering Memorandum Containing Incorrect Static-Pool Performance Data; SkyLend Receivables Trust 2024-1 ($200,000,000 Consumer Receivables Securitization)
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I. Executive Summary
You have asked us to analyze the potential federal securities-law liability exposure arising from the distribution of the Preliminary Offering Memorandum (the "Preliminary OM") dated April 5, 2024, for SkyLend Receivables Trust 2024-1 (the "Trust") to twenty-eight (28) institutional investors during the investor roadshow conducted from April 15 through April 19, 2024. This memorandum sets forth our analysis and conclusions.
As discussed more fully below, the Preliminary OM contained static-pool performance tables and historical delinquency and loss data derived from monthly servicing tapes provided by Clearview Loan Servicing, Inc. ("Clearview"). Those data were subsequently determined to contain material discrepancies, as initially identified by Broadleaf Analytics Group LLC ("Broadleaf") on April 22, 2024, in connection with its independent loan-level due-diligence review.
The key discrepancies are as follows:
• 30+ Day Delinquency Rate (as of March 31, 2024 cut-off date): The Preliminary OM reported a 30+ day delinquency rate of 3.21%. The corrected figure, as determined by Broadleaf and subsequently confirmed by Skybridge Fintech Ltd. ("SBF"), is 5.47%. This represents a discrepancy of 2.26 percentage points, or a 70.4% relative increase over the reported figure.
• Cumulative Net Loss Rate (2022 Origination Vintage): The Preliminary OM reported a cumulative net loss rate for the 2022 origination vintage of 4.12%. The corrected figure is 6.89%. This represents a discrepancy of 2.77 percentage points, or a 67.2% relative increase over the reported figure.
Approximately 14,600 loans — representing 63.2% of the proposed pool of approximately 23,100 loans — were affected by the underlying data error. The root cause has been traced to a system migration undertaken by Clearview in June 2023, from its legacy LoanTrax servicing platform to the ClearCore platform. During the migration, the payment-application waterfall logic was incorrectly configured to apply partial payments to principal before interest, contrary to the contractual waterfall specified in Section 4.03 of the Master Servicing Agreement dated October 1, 2022 (the "MSA"), which requires application in the order of interest, then fees, then principal. This misapplication caused delinquency and loss figures to appear materially lower than actual performance, because partial payments were credited as reducing outstanding principal rather than being allocated first to accrued interest arrearages.
Overall Assessment. While the dissemination of materially inaccurate performance data in the Preliminary OM raises potentially cognizable securities-law claims — most notably under Section 17(a) of the Securities Act of 1933 — several significant mitigating factors substantially reduce the likelihood of successful enforcement action or private litigation. These mitigating factors include: (i) the Rule 144A private-placement framework under which the offering was structured, which limits both the universe of potential claimants and the available statutory causes of action; (ii) the preliminary nature of the document distributed, which was expressly designated as subject to revision; (iii) the absence of any completed sale of securities, which eliminates the purchase-or-sale prerequisite for private Rule 10b-5 claims and the rescission remedy under Section 12(a)(2); and (iv) the absence of scienter on the part of SBF, which relied in good faith on servicing data provided by a contractually obligated third-party servicer.
In our judgment, the overall securities-law exposure arising from the distribution of the Preliminary OM is low. While the SEC retains theoretical enforcement authority under Section 17(a) of the Securities Act — which reaches offers as well as sales of securities and which requires only negligence under subsections (a)(2) and (a)(3) — the absence of investor harm, the prompt corrective action taken by SBF upon discovery of the discrepancy, and the third-party origin of the data error collectively make SEC pursuit of this matter unlikely under current enforcement priorities.
This memorandum is organized as follows: Section II provides the detailed factual background; Section III analyzes exposure under Rule 10b-5 of the Securities Exchange Act of 1934; Section IV analyzes exposure under Section 12(a)(2) of the Securities Act of 1933; Section V analyzes exposure under Section 17(a) of the Securities Act of 1933; Section VI addresses additional regulatory and liability considerations, including Regulation AB, state securities laws, potential common-law claims, Halcyon Securities LLC's potential claims, and officer and director liability; Section VII consolidates the mitigating factors; and Section VIII sets forth recommended remediation and protective steps.
II. Factual Background
A. The Proposed Transaction
SkyLend Receivables Trust 2024-1 (the "Trust") is a Delaware statutory trust formed on February 14, 2024, under a Trust Agreement between SkyLend Funding LLC, as depositor, and Hollowell Financial, as owner trustee. The Trust was assigned Employer Identification Number 93-4201855. It was established for the purpose of issuing asset-backed notes secured by a pool of unsecured consumer installment-loan receivables originated by SBF through its SkyLend digital lending platform.
The proposed capital structure of the offering was as follows:
The Class A Notes and Class B Notes were to be offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933 (relying on the Section 4(a)(2) exemption from registration) and Regulation S for sales to non-U.S. persons. The offering was directed exclusively to qualified institutional buyers ("QIBs") as defined in Rule 144A. The $8,000,000 residual interest was to be retained by SBF through its wholly owned subsidiary, SkyLend Funding LLC, in satisfaction of the risk-retention requirements applicable to the securitization.
Halcyon Securities LLC ("Halcyon") was engaged to serve as the sole bookrunning manager and initial purchaser under a Purchase and Placement Agreement (the "PPA") executed on March 20, 2024, between the Trust, SkyLend Funding LLC, SBF, and Halcyon. The deal was assigned Halcyon internal reference number HLC-ABS-2024-017. CUSIP prefix 87165Q was allocated to the Trust's securities by the CUSIP Service Bureau but was never activated or assigned to specific classes, as the offering never progressed to the pricing stage.
The consumer receivables comprising the proposed collateral pool were originated by SBF through its SkyLend platform, which provides unsecured consumer installment loans to borrowers across forty-seven states and the District of Columbia. SBF's origination program uses a proprietary credit-scoring algorithm supplemented by traditional underwriting criteria. Clearview Loan Servicing, Inc. ("Clearview") has served as the primary third-party servicer for SBF-originated receivables since October 2022 under the terms of the MSA. SBF also retained a backup servicing arrangement with Veltara Financial Services LLC, although that arrangement is not material to the issues addressed in this memorandum.
B. The Preliminary Offering Memorandum
The Preliminary OM was dated April 5, 2024. It was prepared by this firm, serving as issuer's counsel, in coordination with SBF's management team and Halcyon Securities. The document was drafted and circulated in accordance with customary market practice for Rule 144A asset-backed securities offerings and was reviewed by counsel for Halcyon (Whitfield, Drummond & Paige LLP) prior to distribution.
The Preliminary OM contained detailed descriptions of the proposed collateral pool, including the following aggregate pool characteristics as of the March 31, 2024, statistical cut-off date:
• Number of loans: Approximately 23,100
• Aggregate outstanding principal balance (gross): $213,750,000 (prior to final pool selection to arrive at the targeted $200,000,000 closing pool balance)
• Weighted-average coupon ("WAC"): 14.82%
• Weighted-average remaining term: 38.4 months
• Weighted-average FICO score at origination: 698
The Preliminary OM also included detailed static-pool performance tables and historical delinquency and loss data for SBF's prior origination vintages (2021 and 2022), as well as for the receivables proposed for inclusion in the Trust pool. These performance tables were sourced from the monthly servicing tapes provided by Clearview Loan Servicing, Inc. under Servicing Account No. CLS-SBF-2022-0041. Clearview delivered servicing data to SBF in standard SFIG/industry-format electronic files on a monthly basis, with the most recent tape — covering the period ending March 31, 2024 — delivered to SBF on April 3, 2024. This tape formed the basis for the performance metrics reported in the Preliminary OM.
The key performance metrics reported in the Preliminary OM, and which are the subject of this memorandum, were as follows:
• 30+ day delinquency rate: 3.21% of aggregate outstanding principal balance as of the March 31, 2024 cut-off date
• Cumulative net loss rate (2022 origination vintage): 4.12% of original pool balance for the 2022 origination vintage, measured from origination through March 31, 2024
These metrics were central to three critical components of the transaction structure and marketing:
(i) Rating-agency analyses. Meridian Credit Ratings, Inc. ("Meridian"), with Gregory Fontaine serving as lead analyst, and Carrollton Ratings Group LLC ("Carrollton"), with Teresa Kobayashi serving as lead analyst, each relied on the static-pool performance data in formulating their preliminary ratings of the Class A and Class B Notes. The loss assumptions and stress scenarios used by both agencies were calibrated in part based on the historical delinquency and loss experience reported in the Preliminary OM.
(ii) Credit-enhancement structure. The credit-enhancement levels were sized with reference to the reported pool performance. The proposed structure included overcollateralization of 3.5% (equivalent to $7,000,000 at closing), a funded reserve account of 1.00% (equivalent to $2,000,000), and estimated excess spread of 2.85% per annum. These levels were designed to support the target ratings in light of the reported 30+ day delinquency rate of 3.21% and cumulative net loss rate of 4.12% for the 2022 vintage.
(iii) Investor marketing narrative. The roadshow presentation and marketing materials emphasized the strong credit performance of SBF's origination vintages, with the 30+ day delinquency rate and cumulative net loss figures prominently featured as indicators of underwriting quality and servicing discipline. These metrics were discussed in detail during the investor meetings conducted from April 15 through April 19, 2024.
The Preliminary OM contained customary disclaimers consistent with market practice for preliminary offering documents in Rule 144A securitization transactions. These included express statements that the information contained therein was preliminary and subject to change, that the final terms of the offering would be set forth in a final offering memorandum, and that the Preliminary OM did not constitute an offer to sell or a solicitation of an offer to buy in any jurisdiction where such an offer or solicitation would be unlawful.
C. Distribution to Investors
The Preliminary OM was distributed to twenty-eight (28) institutional investors during a five-day investor roadshow conducted from April 15 through April 19, 2024. The roadshow was managed by Halcyon Securities, with Rebecca Thornton, Managing Director, and Jonathan Kramer, Head of ABS Origination, serving as the primary points of contact for Halcyon. SBF was represented at roadshow presentations by Arun Mehta (CEO) and Danielle Prescott (Chief Financial Officer).
All twenty-eight recipients of the Preliminary OM were qualified institutional buyers as defined in Rule 144A(a)(1) under the Securities Act. Distribution was effected electronically via Halcyon's secure investor portal (Thackeray Solutions virtual data room, Project Name: "Skylark"), with physical copies available upon request. We understand from Halcyon that no physical copies were distributed.
During the roadshow period, Halcyon and SBF conducted in-person and video-conference meetings with a subset of the investor recipients, during which SBF management discussed the SkyLend platform's origination strategy, credit performance, and servicing arrangements. The static-pool performance data from the Preliminary OM was presented and discussed during these meetings.
No binding commitments to purchase the Notes were received during or after the roadshow. No indications of interest were formalized in writing. The transaction remained in the marketing phase at all relevant times. Specifically, no pricing term sheet was circulated, no allocation was made, no trade confirmations were issued, and no settlement instructions were exchanged. No securities were sold, issued, or delivered. The transaction was pre-pricing at the time of termination of the marketing process.
D. Discovery of the Discrepancy
Broadleaf Analytics Group LLC ("Broadleaf"), a specialty ABS due-diligence firm, was engaged by Halcyon Securities on March 25, 2024, to perform independent loan-level due diligence and re-underwriting on a stratified random sample of the proposed collateral pool. Broadleaf's engagement, managed by Sanjay Rajan, Managing Director, covered a sample of approximately 1,500 loans, representing approximately 6.5% of the total pool by loan count. The sample was stratified by origination vintage, loan size, FICO band, and geographic concentration to ensure statistical representativeness.
Broadleaf's scope of work included re-verification of loan-level data fields, compliance testing, re-underwriting of a subsample, and — critically — independent reconciliation of payment histories against the servicing data reflected in Clearview's monthly tapes.
On April 22, 2024, Broadleaf communicated its preliminary findings to Halcyon Securities and, through Halcyon, to SBF and this firm. Broadleaf identified that the servicing-data tapes provided by Clearview for the SBF portfolio applied a payment-application waterfall that was inconsistent with the contractual waterfall specified in Section 4.03 of the MSA. Under Section 4.03 of the MSA, partial payments received from borrowers are to be applied in the following order: (1) accrued interest, (2) fees, and (3) outstanding principal. However, Clearview's ClearCore servicing system was applying partial payments in the following order: (1) outstanding principal, (2) accrued interest, (3) fees.
This misapplication of the payment waterfall had the effect of causing the servicing data to report artificially low delinquency and loss figures. By applying partial payments first to principal, ClearCore reduced the outstanding principal balance of affected loans, which in turn reduced the denominator against which delinquency and loss metrics were calculated, and also masked the extent of interest arrearages that should have been reflected in the delinquency classification of the affected accounts. In practical terms, borrowers who were making partial payments were being classified as current or less delinquent than they actually were, because the principal-first application caused the system to treat those borrowers as having satisfied a greater proportion of their scheduled payment obligations than was actually the case under the contractual terms.
The corrected metrics, as determined by Broadleaf and subsequently validated by SBF's internal data team, were as follows:
Approximately 14,600 loans were affected by the waterfall error, representing 63.2% of the approximately 23,100 loans in the proposed pool. The pervasive nature of the error reflects the fact that the ClearCore migration affected all loans that Clearview was servicing on SBF's behalf as of the June 2023 migration date, with the exception of a small number of loans that had been fully paid or charged off prior to that date.
The root cause of the error was Clearview's system migration from the LoanTrax platform to the ClearCore platform in June 2023. During the migration, the payment-waterfall logic in ClearCore was configured incorrectly. Clearview's post-migration validation procedures failed to detect the error, apparently because the validation testing focused on data-field mapping and balance reconciliation at the portfolio level rather than on the accuracy of the underlying payment-application logic at the loan level. Similarly, SBF's quarterly data-reconciliation procedures — which compared aggregate portfolio statistics reported by Clearview against SBF's internal origination records — did not detect the discrepancy, because SBF's reconciliation processes compared ending balances and aggregate delinquency classifications rather than independently re-deriving delinquency classifications from loan-level payment history.
E. Subsequent Events
The timeline of events following Broadleaf's discovery of the discrepancy is as follows:
April 23, 2024. Halcyon Securities, through its outside counsel Whitfield, Drummond & Paige LLP ("WDP") and specifically Harrison Whitfield III, formally notified SBF (through this firm) of Broadleaf's findings. The notification identified the payment-waterfall discrepancy as a potential material data integrity issue affecting the accuracy of the Preliminary OM and requested an immediate response from SBF and Clearview.
April 24, 2024. SBF commenced an internal investigation into the scope and impact of the data discrepancy. SBF's internal data team, led by Director of Data Analytics Priya Sundaram, undertook an independent reconstruction of payment histories for a subset of affected loans. Clearview Loan Servicing, through its Chief Executive Officer Warren Pettigrew and Vice President of Operations Meredith Sloane, issued a preliminary written response acknowledging the system migration as the likely source of the error and committing to a full remediation of the ClearCore waterfall logic.
April 26, 2024. Halcyon formally suspended all marketing activities for SkyLend Receivables Trust 2024-1 and delivered a written notice to SBF and the Trust invoking the force-majeure and material-change provisions of the PPA. Halcyon's notice stated that the data discrepancy constituted a material adverse change in the condition of the collateral pool as reported in the Preliminary OM and reserved all rights under the PPA, including the right to terminate the agreement and to seek indemnification for all costs and expenses incurred in connection with the transaction.
April 29, 2024. Carrollton Ratings Group LLC placed its expected ratings for the Class A and Class B Notes on "developing" watch, citing the data integrity concerns and the suspension of marketing activities. Carrollton's watch notice was issued to SBF, Halcyon, and the Trust.
May 1, 2024. Meridian Credit Ratings, Inc. withdrew its preliminary ratings for the Class A and Class B Notes, citing the inability to confirm the accuracy of the static-pool performance data that formed the basis of its credit analysis.
May 3, 2024. The SBF Board of Directors has scheduled a meeting to consider a recommendation from management and outside counsel to formally terminate the SkyLend Receivables Trust 2024-1 transaction. A separate Board Memorandum dated May 3, 2024, has been prepared by this firm setting forth the basis for the termination recommendation.
As of the date of this memorandum, the transaction has not been formally terminated. However, the withdrawal of Meridian's preliminary ratings, Carrollton's placement of its expected ratings on "developing" watch, and Halcyon's suspension of marketing activities have effectively ended any prospect of proceeding with the offering in its current form. Termination is recommended, and we expect the Board to act accordingly at the May 3 meeting.
III. Analysis Under Rule 10b-5 (Securities Exchange Act of 1934)
A. Elements of a Rule 10b-5 Claim
Rule 10b-5, codified at 17 C.F.R. § 240.10b-5 and promulgated by the Securities and Exchange Commission ("SEC") under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), is the principal federal antifraud provision in the securities laws. The rule makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange:
(a) to employ any device, scheme, or artifice to defraud;
(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
In a private action under Rule 10b-5, a plaintiff must establish six elements: (1) a material misstatement or omission; (2) scienter (i.e., an intent to deceive, manipulate, or defraud, or, in most circuits, severe recklessness); (3) a connection between the misstatement and the purchase or sale of a security; (4) reliance by the plaintiff on the misstatement; (5) economic loss; and (6) loss causation — i.e., a causal connection between the misstatement and the economic loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005); Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
For SEC enforcement actions, the scienter requirement applies to claims brought under Rule 10b-5(b), which addresses material misstatements and omissions. However, certain circuits have held that the SEC may establish violations of Rule 10b-5(a) and 10b-5(c) — which address scheme liability — upon a showing of negligence in certain circumstances, though the prevailing view is that scienter is required for all subsections. See Aaron v. SEC, 446 U.S. 680 (1980) (holding that scienter is required for SEC enforcement actions under Section 10(b) and Rule 10b-5). Importantly, the SEC is not bound by the Private Securities Litigation Reform Act's heightened pleading standards or the purchase-or-sale requirement that constrains private litigants.
We analyze each of the relevant elements below as applied to the facts of this matter.
B. Material Misstatement or Omission
The static-pool performance data included in the Preliminary OM reported a 30+ day delinquency rate of 3.21% and a cumulative net loss rate for the 2022 origination vintage of 4.12%. Both metrics materially understated the actual performance of the collateral pool. As determined by Broadleaf and confirmed by SBF, the actual 30+ day delinquency rate was 5.47% (70.4% higher than reported), and the actual cumulative net loss rate for the 2022 vintage was 6.89% (67.2% higher than reported).
Delinquency and cumulative net loss performance are among the most critical data points for investors evaluating asset-backed securities. These metrics directly inform investors' expectations regarding the likelihood and severity of credit losses in the collateral pool, which in turn drive pricing, yield requirements, and the adequacy of credit enhancement. A 2.26 percentage point increase in 30+ day delinquency (from 3.21% to 5.47%) and a 2.77 percentage point increase in cumulative net losses (from 4.12% to 6.89%) would substantially alter the credit profile of the proposed Notes and the risk-return calculus for potential investors.
Under the materiality standard established by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), and reaffirmed in Basic Inc. v. Levinson, 485 U.S. 224 (1988), a fact is material if there is a "substantial likelihood that a reasonable [investor] would consider it important" in making an investment decision, or, put differently, if disclosure of the omitted or misstated fact would have "significantly altered the 'total mix' of information" available to the investor. Applied here, the corrected data would likely have led to materially different conclusions regarding the expected loss severity of the proposed pool, the adequacy of the credit-enhancement structure, and the appropriate pricing of the Notes. In particular:
• The corrected delinquency rate of 5.47% represents a qualitatively different credit profile than the reported rate of 3.21%. In consumer ABS markets, a 30+ day delinquency rate of 3.21% is consistent with a well-performing pool and supports investment-grade ratings at the proposed credit-enhancement levels. A rate of 5.47%, by contrast, would raise significant concerns about the performance trajectory of the pool and would likely require substantially higher credit-enhancement levels to support the same ratings.
• The corrected cumulative net loss rate of 6.89% for the 2022 vintage is nearly 68% higher than the reported rate of 4.12%. This magnitude of increase would likely cause the rating agencies to revise their loss assumptions upward, which in turn would require either higher credit enhancement, lower ratings, wider pricing spreads, or some combination thereof.
• The discrepancy affected 63.2% of the proposed pool, making it pervasive rather than isolated. An error affecting a small subset of loans might be viewed differently, but one affecting nearly two-thirds of the pool undermines the reliability of the reported performance data as a whole.
We conclude that the discrepancies in the static-pool performance data would likely be deemed material under the TSC Industries / Basic standard. We do not believe this element would be a viable defense for SBF in any forum.
C. Scienter
Rule 10b-5 requires a showing of scienter — that is, "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Most federal circuits, including the Second Circuit, also permit Rule 10b-5 liability based on a showing of "severe recklessness," defined as "an extreme departure from the standards of ordinary care" that presents "a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." See Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000); South Cherry Street, LLC v. Hennessee Group LLC, 573 F.3d 98, 109 (2d Cir. 2009).
The facts of this matter present a weak case for scienter on the part of SBF, its officers, or its directors. The following considerations are dispositive:
Origin of the error. The misstatement in the Preliminary OM originated with Clearview Loan Servicing, Inc., an independent third-party servicer. The incorrect payment-waterfall logic in Clearview's ClearCore system was introduced during Clearview's own internal system migration in June 2023. There is no evidence that any SBF personnel participated in, directed, or were aware of the system migration or the resulting error in the payment-application logic. SBF received monthly servicing tapes from Clearview in the ordinary course and included the data from those tapes in the Preliminary OM in good-faith reliance on Clearview's contractual obligation to provide accurate data.
SBF's reliance on Clearview. Under Section 5.01 of the MSA, Clearview represented and warranted that all servicing data delivered to SBF would be "true, correct, and complete in all material respects" and would be "prepared and delivered in accordance with the Servicing Standards and applicable law." SBF's reliance on these representations in a two-year servicing relationship, in which Clearview had consistently delivered servicing data without prior incident, does not constitute the type of extreme departure from ordinary care that gives rise to severe recklessness. Courts have consistently held that reliance on representations from a contractually obligated counterparty does not, without more, establish recklessness. See, e.g., In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 662 (S.D.N.Y. 2004) (distinguishing between reliance on internally generated data and reliance on data provided by third parties).
SBF's quarterly reconciliation. SBF conducted quarterly data-reconciliation procedures as part of its portfolio-management activities. These procedures compared aggregate portfolio statistics reported by Clearview — including ending balances, payment rates, and aggregate delinquency classifications — against SBF's internal origination records. The reconciliation procedures did not, however, include independent re-derivation of delinquency classifications from loan-level payment histories, which would have been necessary to detect the ClearCore waterfall error. While this represents a gap in SBF's verification procedures, the failure to conduct more granular verification does not, in our view, rise to the level of severe recklessness. The quarterly reconciliation was consistent with industry practice for originators that outsource servicing to third-party servicers, and there were no red flags — such as material reconciliation exceptions, servicing complaints, or anomalous performance trends — that should have prompted deeper investigation.
Absence of red flags. The strongest argument against SBF on the scienter element would be a recklessness theory based on SBF's failure to independently verify Clearview's data following the June 2023 system migration. However, this argument faces substantial hurdles. SBF was aware that Clearview undertook a system migration in June 2023, as Clearview provided advance notice of the migration as required under Section 7.04 of the MSA. However, Clearview also represented to SBF that the migration had been completed successfully and that post-migration validation testing had confirmed data integrity. SBF received no indication — from Clearview, from its own reconciliation procedures, from warehouse lenders, or from any other source — that the ClearCore system was applying payments in an incorrect order. The absence of any such red flag prior to Broadleaf's discovery on April 22, 2024, significantly undermines any argument that SBF acted with severe recklessness.
Clearview's scienter. The question of whether Clearview itself possessed scienter — i.e., whether Clearview knew or was severely reckless in not knowing that the ClearCore payment waterfall was incorrectly configured — is a separate question that does not directly bear on SBF's liability. Even if Clearview acted with scienter (a question we do not address in this memorandum), that scienter would not automatically be imputed to SBF. Clearview is an independent contractor, not an agent of SBF, and its knowledge is not attributable to SBF under general principles of imputation. See Restatement (Third) of Agency § 5.03 (2006); see also Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004) (scienter of third-party accountant not imputed to issuer absent showing that issuer knew of or recklessly disregarded the accountant's errors).
Assessment. SBF likely lacks scienter for Rule 10b-5 purposes. The strongest argument against SBF would be a recklessness theory premised on the failure to implement more rigorous verification procedures following the June 2023 system migration, but this argument faces substantial hurdles given the absence of red flags, SBF's good-faith reliance on Clearview's contractual representations, and the industry-standard nature of SBF's reconciliation procedures. We assess the probability that a court or the SEC could establish scienter against SBF as low.
D. "In Connection With the Purchase or Sale of a Security"
Rule 10b-5 requires that the misstatement or omission be made "in connection with the purchase or sale of any security." In a private action, this requirement incorporates the standing limitation established by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), which holds that only actual purchasers or sellers of securities have standing to bring a private action under Rule 10b-5. Persons who merely contemplated a purchase or were solicited but did not consummate a transaction — so-called "frustrated buyers" — lack standing.
Here, the Notes contemplated by the SkyLend Receivables Trust 2024-1 transaction were never priced, sold, issued, or settled. No institutional investor purchased any security in connection with the offering. The transaction was in the marketing phase — specifically, the preliminary roadshow — at the time the data discrepancy was discovered, and all marketing activities were suspended on April 26, 2024. No indications of interest were formalized, and no allocations were made. Accordingly, none of the twenty-eight institutional investors that received the Preliminary OM qualifies as a "purchaser" with standing to bring a private Rule 10b-5 claim.
We note, however, that the Blue Chip Stamps purchase-or-sale requirement applies only to private actions. The SEC's enforcement authority is not limited by this standing requirement. The SEC has brought enforcement actions in circumstances where misstatements were made "in connection with" an offering of securities even though no sale was ultimately consummated. See SEC v. Zandford, 535 U.S. 813 (2002) (broadly interpreting "in connection with"); SEC v. Pirate Investor LLC, 580 F.3d 233, 239 (4th Cir. 2009) (the "in connection with" requirement is satisfied when the fraud and the securities transaction "coincide"). The distribution of the Preliminary OM to twenty-eight institutional investors as part of a formal roadshow in connection with the proposed offering of the Notes would likely satisfy the "in connection with" requirement for SEC enforcement purposes, even though no sale was completed.
Assessment. The absence of a completed purchase or sale of securities is a critical bar to any private Rule 10b-5 claim. No institutional investor has standing under Blue Chip Stamps. For SEC enforcement purposes, the "in connection with" requirement would likely be met, but the absence of a completed sale nevertheless significantly reduces the likelihood that the SEC would devote enforcement resources to this matter, as discussed further in Section VII.
E. Reliance and Loss Causation
Because no securities were sold in connection with the offering, the reliance and loss-causation elements of a private Rule 10b-5 claim cannot be established by any potential plaintiff.
Reliance. A private Rule 10b-5 plaintiff must demonstrate reliance on the defendant's misstatement or omission. See Basic Inc. v. Levinson, 485 U.S. 224 (1988). In the context of a primary-market offering of asset-backed securities to a limited number of institutional investors (as opposed to a secondary-market trading claim where the fraud-on-the-market presumption might apply), reliance would need to be established on a transaction-specific basis. Because no investor consummated a purchase, no investor can demonstrate that it relied on the Preliminary OM in making an investment decision — there was no investment decision to rely upon.
Loss causation. A private plaintiff must also establish loss causation — a causal connection between the misstatement and the plaintiff's economic loss. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). Here, no investor suffered any economic loss. No capital was committed, no funds were disbursed, and no securities were acquired that subsequently declined in value. The absence of economic loss eliminates both the loss-causation element and the damages component of any private claim.
Assessment. The inability to establish reliance or loss causation is fatal to any private Rule 10b-5 claim. These elements are not required for SEC enforcement actions, but the absence of investor harm is a significant factor that the SEC considers in exercising its enforcement discretion.
F. Summary — Rule 10b-5
Based on the foregoing analysis, we assess the Rule 10b-5 exposure as follows:
• Private litigation risk: Low. No purchase or sale of securities occurred; no investor has standing under Blue Chip Stamps; no economic loss to any investor; reliance and loss causation cannot be established. Scienter is likely absent. Private Rule 10b-5 claims arising from the Preliminary OM are, in our judgment, not viable.
• SEC enforcement risk: Low to moderate. The SEC is not bound by the purchase-or-sale standing requirement and could theoretically pursue an enforcement action based on the distribution of materially inaccurate information in the Preliminary OM. However, SBF's lack of scienter, the immediate corrective action taken upon discovery of the discrepancy, the private-placement context, and the absence of any investor harm significantly reduce the likelihood that the SEC would pursue this matter. We note that the SEC's Enforcement Division has historically focused its limited resources on cases involving completed transactions, investor harm, and evidence of intentional or reckless misconduct, none of which are present here.
IV. Analysis Under Securities Act § 12(a)(2)
A. Statutory Framework
Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a)(2), imposes liability on any person who "offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." The provision creates a private right of action for the purchaser of the security against the statutory "seller."
Several features of Section 12(a)(2) distinguish it from Rule 10b-5:
• No scienter requirement. Section 12(a)(2) imposes liability without regard to the defendant's intent; the applicable standard is negligence, not fraud. However, the statute provides an affirmative defense: the defendant is not liable if it can demonstrate that it "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission" (the "reasonable-care defense").
• Statutory seller requirement. Liability extends to "any person" who "offers or sells" the security by means of the defective prospectus or communication. The Supreme Court has interpreted "seller" in this context to include not only persons who pass title to the security but also persons who "solicit" the purchase, motivated at least in part by a desire to serve their own financial interests. Pinter v. Dahl, 486 U.S. 622, 647 (1988).
• Remedy. Section 12(a)(2) provides a rescission remedy — the purchaser may recover the consideration paid for the security, with interest, less any income received. If the purchaser no longer holds the security, the remedy is damages (the difference between the purchase price and the disposition price).
B. Applicability to Rule 144A Offerings
The threshold question under Section 12(a)(2) is whether the provision applies to a Rule 144A private-placement offering in which the distributed document is a preliminary offering memorandum rather than a registered prospectus.
In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Supreme Court held that the term "prospectus" as used in Section 12(a)(2) refers to the document described in Section 10 of the Securities Act — i.e., a prospectus that is required to be filed as part of a Securities Act registration statement. The Court reasoned that applying Section 12(a)(2) to private and secondary transactions would extend the provision "beyond its intended reach" and would render other provisions of the Securities Act superfluous. Under Gustafson, Section 12(a)(2) is limited to public offerings of securities pursuant to a registration statement filed under the Securities Act.
In a Rule 144A private placement, the offering memorandum is not a "prospectus" within the meaning of Section 10 of the Securities Act. The offering is not conducted pursuant to a registration statement; rather, it relies on the exemption from registration provided by Section 4(a)(2) of the Securities Act, with Rule 144A establishing a non-exclusive safe harbor for resales of securities to QIBs. The Preliminary OM distributed to the twenty-eight institutional investors in this case was expressly identified as a preliminary offering memorandum for a Rule 144A placement, not as a statutory prospectus.
Substantial authority supports the position that Section 12(a)(2) does not apply to Rule 144A offerings distributed exclusively to QIBs. See, e.g., Yung v. Lee, 432 F.3d 142, 149 (2d Cir. 2005) (reaffirming Gustafson's limitation of Section 12(a)(2) to public offerings); In re Lehman Brothers Mortgage-Backed Securities Litigation, 650 F.3d 167 (2d Cir. 2011) (analyzing the scope of "prospectus" under Gustafson). The weight of authority in the Second Circuit — the jurisdiction most likely to have nexus over claims arising from this transaction — is firmly in favor of this limitation.
Assessment. Section 12(a)(2) claims arising from the Preliminary OM are likely precluded as a matter of law because the offering was structured as a Rule 144A private placement and the Preliminary OM is not a statutory prospectus under Section 10 of the Securities Act. We view this as a strong threshold defense that would likely be dispositive on a motion to dismiss.
C. Even If Section 12(a)(2) Applied
Even assuming, arguendo, that a court were to find Section 12(a)(2) applicable to the distribution of the Preliminary OM, SBF would have additional defenses:
Material misstatement. The materiality analysis is the same as under Rule 10b-5. As discussed in Section III.B, the discrepancies in the static-pool performance data would likely be deemed material. This element would not provide a viable defense.
Reasonable-care defense. Unlike Rule 10b-5, Section 12(a)(2) affords the defendant the opportunity to establish that it "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission." SBF would have a reasonable basis for asserting this defense, grounded in the following considerations:
(i) SBF relied on Clearview, a reputable third-party servicer with a two-year track record of servicing SBF's portfolio, which was contractually obligated under the MSA to provide accurate servicing data;
(ii) SBF maintained quarterly data-reconciliation procedures consistent with industry practice for originators that outsource servicing;
(iii) SBF's independent auditor, Rowland & Cross LLP, audited SBF's financial statements for the fiscal year ended December 31, 2023, without qualification, and did not identify the ClearCore waterfall error;
(iv) SBF cooperated fully with Halcyon's engagement of Broadleaf Analytics Group LLC to perform independent loan-level due diligence; and
(v) No red flags or anomalous performance trends were observed that should have prompted SBF to undertake more granular verification of Clearview's servicing data prior to Broadleaf's discovery.
While the reasonable-care defense is fact-intensive and cannot be resolved with certainty at this stage, we believe SBF has a credible basis for invoking it.
No sale occurred. Even if Section 12(a)(2) were applicable and the reasonable-care defense were to fail, the absence of a completed sale of securities eliminates the operative remedy. The rescission remedy under Section 12(a)(2) requires an actual sale — the purchaser's right is to "recover the consideration paid for such security with interest thereon." 15 U.S.C. § 77l(a)(2). Here, no consideration was paid by any investor, no securities were delivered, and there is nothing to rescind. In the absence of a completed sale, the damages measure under Section 12(a)(2) (applicable where the security has been disposed of) is likewise inapplicable. Accordingly, even in the unlikely event that a court found Section 12(a)(2) applicable and rejected the reasonable-care defense, no remedy would be available to any plaintiff.
D. Summary — Section 12(a)(2)
Exposure: Very Low. The statutory framework of Section 12(a)(2) is likely inapplicable to the Rule 144A offering at issue under Gustafson. Even if applicable, the reasonable-care defense provides a credible basis for avoiding liability. Most fundamentally, no sale occurred, eliminating the rescission remedy and any available damages measure. The combination of these factors makes Section 12(a)(2) exposure de minimis.
V. Analysis Under Securities Act § 17(a)
A. Statutory Framework
Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), provides that it shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement, by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:
(1) to employ any device, scheme, or artifice to defraud;
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
Section 17(a) is exclusively an enforcement provision. The Supreme Court has not recognized a private right of action under Section 17(a), and the lower federal courts have overwhelmingly held that no such right exists. See, e.g., Maldonado v. Dominguez, 137 F.3d 1, 7 (1st Cir. 1998); Finkel v. Stratton Corp., 962 F.2d 169, 174 (2d Cir. 1992).
The scienter requirements under Section 17(a) vary by subsection. In Aaron v. SEC, 446 U.S. 680 (1980), the Supreme Court held that:
• Section 17(a)(1) requires a showing of scienter (intent to defraud or severe recklessness), consistent with the standard applicable under Rule 10b-5;
• Sections 17(a)(2) and 17(a)(3) require only a showing of negligence.
This is a critical distinction. The lower scienter threshold for Sections 17(a)(2) and 17(a)(3) means that the SEC could potentially pursue an enforcement action against SBF under these subsections based on a negligence theory, even if the SEC could not establish the scienter required for Section 17(a)(1) or Rule 10b-5.
Additionally, and of particular relevance to this matter, Section 17(a) applies to conduct "in the offer or sale" of securities. The term "offer" is defined broadly in Section 2(a)(3) of the Securities Act to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." This is broader than the "in connection with the purchase or sale" language of Rule 10b-5 and Section 10(b), which — for private actions — requires an actual purchase or sale under Blue Chip Stamps. The distribution of the Preliminary OM to twenty-eight institutional investors as part of a formal roadshow in connection with the proposed offering of the Notes would constitute an "offer" within the meaning of Section 17(a), even though no sale was consummated.
B. Application to the Preliminary OM Distribution
The distribution of the Preliminary OM and the conduct of the roadshow presentations constitute offers of the Class A and Class B Notes within the meaning of Section 17(a). The roadshow was a solicitation of offers to purchase the Notes, conducted in interstate commerce through electronic distribution of the Preliminary OM and through in-person and video-conference presentations. These activities fall squarely within the "in the offer" language of Section 17(a).
Under this framework, the analysis of potential Section 17(a) liability proceeds as follows:
Section 17(a)(1) — scheme to defraud. Section 17(a)(1) requires scienter. For the reasons discussed in Section III.C above, SBF likely lacks the requisite scienter. No evidence suggests that SBF employed any device, scheme, or artifice to defraud the roadshow investors. The misstatement in the Preliminary OM resulted from SBF's good-faith reliance on erroneous servicing data from Clearview, not from any intentional or reckless effort by SBF to deceive potential investors.
Section 17(a)(2) — material misstatement for the purpose of obtaining money or property. Section 17(a)(2) requires only negligence but includes the additional element that the defendant must "obtain money or property" by means of the untrue statement. SBF's failure to independently verify Clearview's servicing data before including it in the Preliminary OM could arguably satisfy the negligence standard — a reasonable issuer in SBF's position might have undertaken more rigorous verification of the data underlying its offering document, particularly following Clearview's system migration in June 2023. However, SBF did not "obtain money or property" through the misstatements in the Preliminary OM. No investor purchased any securities, and no proceeds were received by SBF, the Trust, or any other party. While some courts have interpreted "obtain money or property" broadly in the context of Ponzi schemes and other ongoing frauds, the absence of any monetary exchange in this case presents a significant obstacle to a Section 17(a)(2) claim. See SEC v. Zandford, 535 U.S. 813 (2002) (analyzing the "obtain money or property" element in the context of a completed transaction).
Section 17(a)(3) — fraudulent course of business. Section 17(a)(3) requires only negligence and does not contain the "obtain money or property" requirement of Section 17(a)(2). It prohibits engaging in any "transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." The distribution of a Preliminary OM containing materially inaccurate static-pool performance data to twenty-eight institutional investors as part of a formal roadshow could be characterized as a practice that "operates . . . as a fraud or deceit" upon potential purchasers, even in the absence of a completed sale. The negligence standard is more readily satisfied than scienter: SBF's failure to independently verify Clearview's data, combined with the pervasive nature of the error (affecting 63.2% of the pool), could support a finding of negligence under Section 17(a)(3).
However, several factors significantly mitigate the risk that the SEC would pursue a Section 17(a)(3) claim in these circumstances:
• No investor harm. No investor suffered any economic loss. No securities were sold, and no capital was committed. The absence of investor harm is a critical factor in the SEC's exercise of enforcement discretion.
• Prompt corrective action. SBF took immediate corrective action upon learning of the discrepancy, commencing an internal investigation within one day and cooperating fully with Halcyon's suspension of marketing activities. The SEC has consistently recognized prompt corrective action as a mitigating factor in enforcement decisions. See SEC Enforcement Manual § 6.1 (Factors Considered in Exercising Prosecutorial Discretion).
• Preliminary nature of the document. The document was expressly designated as a "Preliminary" Offering Memorandum, subject to change, and accompanied by customary disclaimers. No final offering memorandum was ever produced or distributed.
• Private-placement context. The offering was directed exclusively to sophisticated institutional investors (QIBs) in a Rule 144A private placement, not to retail investors. The SEC's enforcement priorities generally focus on cases involving harm to less sophisticated investors or to the public markets.
• Third-party origin of the error. The misstatement originated with Clearview, an independent third-party servicer, and was not generated or manipulated by SBF.
Assessment. Section 17(a) presents the most plausible basis for SEC enforcement exposure among the statutory provisions analyzed in this memorandum. Unlike Rule 10b-5, Section 17(a) reaches "offers" of securities (not just purchases or sales), meaning the absence of a completed sale does not preclude a Section 17(a) claim. And unlike Section 12(a)(2), Section 17(a) is not limited by Gustafson's restriction to public offerings. Moreover, Sections 17(a)(2) and 17(a)(3) require only negligence, a lower bar than the scienter required for Rule 10b-5. Nevertheless, the absence of any investor harm, the immediate corrective action taken by SBF, the preliminary nature of the OM, the private-placement context, and the third-party origin of the data error collectively make SEC pursuit of a Section 17(a) claim against SBF unlikely under current enforcement priorities.
C. Summary — Section 17(a)
• Private litigation risk: None. There is no private right of action under Section 17(a).
• SEC enforcement risk: Low to moderate. Section 17(a) has broader reach than Rule 10b-5 in terms of both the "offer" versus "sale" language and the lower scienter threshold for subsections (a)(2) and (a)(3). These features make Section 17(a) the most plausible basis for SEC action. However, the risk is substantially mitigated by the absence of investor harm, the prompt corrective action, the preliminary nature of the document, the private-placement framework, and the third-party origin of the error. We assess the overall probability that the SEC would bring a Section 17(a) enforcement action against SBF as low.
VI. Additional Regulatory and Liability Considerations
A. Regulation AB and SEC Reporting
Regulation AB, codified at 17 C.F.R. §§ 229.1100 through 229.1125, establishes the SEC's comprehensive disclosure framework for registered offerings of asset-backed securities. Regulation AB prescribes detailed requirements for the disclosure of pool-level and loan-level data, static-pool performance information, servicing arrangements, and related matters in registration statements and prospectuses for registered ABS offerings.
The SkyLend Receivables Trust 2024-1 offering was structured as a Rule 144A private placement, not as a registered offering under the Securities Act. Accordingly, the full disclosure regime of Regulation AB — including the loan-level data requirements of Rule 193 and Item 1111 of Regulation AB — does not apply by its terms to this transaction. The Preliminary OM was prepared in accordance with market practice for Rule 144A ABS offerings, not in compliance with Regulation AB.
We note, however, that the SEC has in certain instances taken the position that Rule 144A ABS offerings that subsequently contemplate resale registration — for example, through an A/B exchange offer pursuant to a registration-rights agreement — may trigger retrospective Regulation AB-type disclosure obligations when the exchange offer registration statement is filed. In such cases, the SEC staff has indicated that the disclosure provided to Rule 144A purchasers should be consistent with the disclosure that would be required in a registered offering.
This concern is not present here. The SkyLend Receivables Trust 2024-1 transaction did not contemplate an A/B exchange offer or any other form of subsequent registration. The Notes were intended to remain in Rule 144A form for the life of the securities. Accordingly, Regulation AB does not create independent disclosure obligations or independent exposure in this context.
Assessment. Regulation AB does not apply to this transaction and does not create independent exposure. No Regulation AB-related disclosure deficiency exists.
B. State Securities Laws (Blue Sky)
State securities laws — commonly known as "Blue Sky" laws — include both registration requirements and antifraud provisions. The interplay between state securities laws and the federal Rule 144A framework is governed by the National Securities Markets Improvement Act of 1996 ("NSMIA"), 15 U.S.C. § 77r, which preempts state registration requirements for "covered securities." Securities sold in transactions exempt from registration under Rule 144A to QIBs constitute "covered securities" within the meaning of NSMIA, and state registration requirements are therefore preempted.
NSMIA does not, however, preempt state antifraud provisions. States retain authority to enforce their antifraud statutes in connection with the offer or sale of securities within their borders, even for covered securities. See 15 U.S.C. § 77r(c)(1).
In practical terms, the analysis of potential exposure under state antifraud provisions mirrors the federal analysis. The key considerations are the same: no securities were sold, no investors suffered economic losses, and SBF lacked scienter. State antifraud statutes generally require either intentional fraud, negligent misrepresentation, or — in some states — strict liability, but all require some form of completed transaction or quantifiable harm for the imposition of damages. The absence of a completed sale and the absence of investor harm are equally dispositive under state antifraud provisions as they are under the federal securities laws.
Additionally, the twenty-eight institutional investor recipients are sophisticated QIBs, many of which are themselves regulated entities (e.g., insurance companies, registered investment companies, and bank-affiliated entities). State regulators are unlikely to pursue enforcement actions on behalf of such investors in the absence of actual harm.
Assessment. The incremental exposure from state securities laws is minimal. State registration requirements are preempted by NSMIA for Rule 144A offerings. State antifraud provisions are not preempted, but the same factors that mitigate federal exposure — no sale, no investor loss, no scienter — apply with equal force under state law.
C. Potential Investor Claims (Fraud / Negligent Misrepresentation Under State Common Law)
In the absence of a securities sale, the twenty-eight institutional investors that received the Preliminary OM could theoretically assert state common-law claims for negligent misrepresentation — or, in some jurisdictions, fraud or promissory estoppel — based on the materially inaccurate performance data contained in the Preliminary OM. Such claims would be asserted outside the federal securities-law framework and would be governed by the common law of the relevant state (likely Delaware or New York).
To prevail on a claim for negligent misrepresentation under New York law, for example, a plaintiff must establish: (i) that the defendant had a duty, as a result of a special relationship, to give correct information; (ii) that the defendant made a false representation that it should have known was incorrect; (iii) that the information supplied was known to be desired by the plaintiff for a seriou

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