A California auto dealer abruptly closed most of its locations this past week without explanation, according to multiple reports, leaving employees unable to cash their paychecks amid rumors of a possible sale. But records filed in an ongoing fraud case brought by the Securities and Exchange Commission offer some insight as to the possible root cause: the dealership’s owner has been struggling to grapple with an immense load of debt.
A report from the Daily Republic in Solano County, California, first broke word of the closures on Friday, confirming six of the seven dealerships owned by Momentum Auto Group had closed up shop. A day later, a local ABC affiliate reported a seventh dealership had closed, with some locations posting signs that read “closed until further notice,” while others said “out of business.”
(Momentum is ranked by Automotive News as the 124th largest auto dealer in the U.S., closing $565 million in sales last year.)
“One employee who stopped there Friday to collect his final paycheck said the situation began to unfold Nov. 9 when employees did not receive their paychecks as scheduled,” the Daily Republic reported. “The employee said they were told checks would be available the next Monday. When Monday came and the checks were not available, he said the federal holiday was the underlying cause.”
A rep from Momentum Chevrolet in San Jose, when reached by Jalopnik on Monday, said she had no comment on the closures.
It wasn’t immediately known how many workers might be out of a job at this point, nor if the closures are even permanent. Records indicate that Momentum employed about 300 workers in the area.
But what’s clear from records in a separate, ongoing SEC case is that Momentum’s owner, Rahim Hassanally, has spent months trying to address an enormous debt load associated with the dealer group. And while records indicate a sale was in the works, he now finds himself caught up in the fallout of the SEC’s investigation.
Christian Scali, an attorney representing Hassannally, told Jalopnik he had no comment and wasn’t authorized to speak publicly about the closures. Scali said he would connect with Hassanally, who couldn’t be immediately reached, and see if he’d be interested in chatting with us, but as press time, we’ve yet to hear back. (We’ll update the post if that changes.)
“If he’s able to get back to you, he will,” Scali said.
‘If They Were to Become Insolvent, Everyone Loses’
Momentum’s troubles appear linked to an ongoing fraud dispute brought by the SEC against a company named 1st Global Capital. The connection was first highlighted and extensively covered by deBanked, an online news site that covers the alternative finance industry.
Founded in 2014, 1st Global Capital existed in theory to finance small businesses and funded everything from restaurants to manufacturing operations, according to an Aug. 26 story by the Kansas City Star. A fraud lawsuit filed by the SEC in August said the company raised more than $278 million from more than 3,400 investors over a four year period.
1st Global was supposed to take the investor cash and funnel it into so-called “merchant cash advance deals,” essentially cash advances to businesses that couldn’t obtain traditional financing from banks because they have less-than-sterling credit scores. Those businesses included Momentum Auto and Hassanally.
But the SEC alleges 1st Global and its founder, Carl Ruderman, misappropriated at least $35 million, paying some of it directly to himself and companies he controlled, to companies his relatives owned, and to fund personal expenses like a “luxury vacation to Greece and monthly payments for his Mercedes-Benz.” The SEC cites an allegedly problematic $40 million loan to a dealer—first identified by deBanked and confirmed by Jalopnik as Momentum—twice in its complaint against Ruderman. No criminal charges have been filed to date.
(Ruderman, nor his attorney, could be immediately reached for comment. As deBanked noted, $805,000 was also sent to a company that previously controlled Playgirl magazine, which Ruderman owned back in the 1980s. The website said Ruderman maintained a reputation as “something of a kingpin in the pornography world after his huge success in the phone sex industry. Unlike limelight-loving porn titan Hugh Hefner, Ruderman tried to keep a low profile, which eventually earned him the nickname ‘Porn’s invisible man.’”)
The SEC’s case includes emails from 1st Global employees discussing Momentum’s precarious financial situation in April, deBanked reported, noting that Hassanally “intended to either recapitalize the debt or sell the dealerships.” So, the news site said, 1st Global had to decide whether to keep funding the auto dealer group or back off their investment.
“If they were to become insolvent, everyone loses,” 1st Global’s Director of Accounting and Finance wrote, according to deBanked.
By mid-July, a deal was in place. 1st Global signed a Letter of Understanding with Momentum that stipulated the former would commit “additional funding” to the latter “in conjunction” with Momentum’s agreement with a broker to sell the dealership. (A notable, but unrelated aside, highlighted by deBanked: the broker, Dave Cantin, made headlines last year when he and his wife, Real Housewives of New Jersey TV star and fiancée Dina Manzo, were robbed and bound inside their house by masked men.)
The July 19 letter, obtained by Jalopnik, outlined a massive amount of debt that Momentum held by then: $9 million in unpaid state and payroll taxes, $37 million to an unnamed creditor, and an additional $43 million owed to 1st Global.
The agreement was subject to Hassanally agreeing to sell Momentum for at least $75 million above the so-called Blue Sky Value.
To “preserve cash” in the interim, the agreement said, Momentum planned to reduce payments on its debt load to Global by 50 percent until the sale is completed.
A week later 1st Global filed for bankruptcy, and by late August, the SEC had filed its fraud case. Hassanally has since become entangled in several cases in California state court over loans he took on for his business ventures. In one suit filed Nov. 8, creditor Compass Bank accused Hassanally of breaching floorplan financing agreements and fraud. The judge in that case granted a temporary restraining order last Wednesday, deBanked reported, “prohibiting Hassanally from selling, transferring, removing or otherwise disposing of collateral.” The cases remain pending, and a hearing in the Compass Bank case is planned for Dec. 5.
Meanwhile, local officials in Solano County and Momentum customers are left wondering what’s to come of the situation. One official told the Daily Republic that he believes Momentum’s “transitioning to a new owner,” which is certainly optimistic thinking, as he noted car dealerships “probably represent about 20 percent of our sales tax dollars.”
The local ABC affiliate noted that “several surprised customers” arrived on Friday at the Momentum dealership in the City of Vallejo, only to find it was now closed. Those with cars in Momentum’s repair shop, like local resident Eugene Porterfield, were seemingly left without any clue on how he’ll get his car back, or when.
“It bothers me because there’s no information or anything like that,” Porterfield told the ABC outlet, “and now I got to get it from them.”