The US securities regulator has charged the founder of trade finance fintech Triterras with fraud, alleging that transactions were arranged “off-line” and added to its platform later to inflate volumes reported to investors.
The US Securities and Exchange Commission (SEC) alleged in a November complaint that Triterras founder and chief executive Srinivas Koneru directed loans to be added to the fintech’s Kratos platform “after the fact, creating the false impression that those loans originated on the platform”.
The SEC accused Triterras of presenting a “false picture” of its business to investors ahead of its November 2020 merger with Netfin, a Nasdaq-listed special purpose acquisition vehicle.
The SEC also alleged that just 10% of US$1.1bn in trade finance volumes reported by Triterras actually involved lending by funds onboarded onto the platform. The rest consisted of traders financing their own counterparties, it said.
Of that 10%, the SEC said that financing involved only entities majority-owned by Koneru.
Koneru has denied the claims, saying the regulator has failed to understand Triterras’ business model and the wider commodity trading industry, including the role of extended credit terms.
He said in a November court filing that Triterras’ offering “was not a real-time trading platform but instead was a repository for recording transactions electronically after they were negotiated”.
He has also sued the SEC for allegedly filing a non-emergency lawsuit during the US government shutdown in October and November.
The allegations follow heavy losses for investors in the platform.
Triterras launched blockchain-based Kratos in June 2019, first providing a “trade discovery” module designed to facilitate commodity trades before adding a “trade finance” module, connecting traders and lenders, in February 2020.
The company said in September 2020 – two months before the Netfin merger – that Kratos had “facilitated approximately US$5bn of total trade and trade finance volumes” across the previous six months.
Its share price was around US$10 at the time of the merger, which the SEC said generated US$60mn in cash for Koneru, but fell sharply after the company was targeted by short-sellers in early 2021.
Triterras was later delisted by Nasdaq after a series of filing delays, in part caused by disagreements with auditors over the validity of certain transactions.
Over-the-counter shares had fallen to 10 cents when the company was taken private by a Koneru-owned entity this year, the SEC said.
“After the fact”
The SEC complaint focused largely on Kratos’ trade finance module.
It alleged that “much of” the lending activity reported “was sourced and arranged off-line and only added to the Kratos platform after the fact, at Koneru’s direction or with his knowledge, to make it falsely appear to be new trade finance module volume”.
It cited a July 2020 email from Koneru asking a lender not named in the complaint to “approve the trades that have already been disbursed”, adding: “It will help us tremendously. One of my team members will walk your person through and it will take 15 minutes for all trades done since March 2020.”
The SEC said US$65mn in financing provided by that lender was “recorded as though it were August or September 2020 trade financing”, even though it had been disbursed fully by the end of July that year.
That financing was provided to Rhodium Resources, a commodity trader also owned by Koneru which ran into financial difficulties around the same time.
The lender did not sign a service agreement with Kratos and never approved any loans on the platform, the SEC said.
In July 2020, Koneru asked another lender to “get those six trades from the past on Kratos”, the regulator said.
“This conduct falsely inflated the trade finance module volume reported to investors because these loans had not been sourced or arranged through use of the Kratos platform and instead were off-platform financing,” the regulator alleged.
However, Triterras’ November court filing said the platform was “not itself a real-time trading platform”, but rather a “means for recording commodities trades on a reliable electronic platform”.
Traders paid fees to record transactions in this way “because the enhanced transparency, trust, and convenience of Kratos platform reduced the risks and administrative burdens of extending trade credit”, as well as demonstrate transaction history to third parties, Triterras said.
It added that because commodity trades often take months to complete, transactions were “still open”, or unpaid, at the time they were recorded. “They were live transactions yet to be settled,” Triterras said.
The company said this had been disclosed to investors in an October 2020 proxy statement, which said Kratos users could make open orders on the platform “as well as private orders to prearranged counterparties”.
That document said its trade discovery platform “covers the entire lifecycle of a commodity trade, allowing users to find counterparties and transactions on the platform, create buy or sell orders, enter into sales agreements, generate invoices and request funds from lenders in the ‘trade finance’ module”.
It added the platform would act “as a single repository of information, allowing for a secured version of all trade documentation to be shared and visible in real-time to all stakeholders in the trade”.
Trade finance volumes
The SEC complaint also took aim at the transaction volumes Triterras reported from its trade finance module.
It said Triterras told investors it had onboarded 10 lenders to its platform by August 2020, and that the volume of financing provided through that module totalled US$1.1bn.
But the US regulator alleged that 10% of that total was either lending to Rhodium or its subsidiaries, or lending by TAPL, a Koneru-owned fund.
The remaining 90% consisted of transactions where trade credit was extended between counterparties, rather than financing by external lenders, it said.
The situation continued for several months, the SEC alleged.
“Unbeknownst to investors, even through at least February 28, 2021, the 10 lending funds had not provided any financing through the trade finance module that did not involve related parties of Triterras,” it said.
Triterras said in response that the SEC has failed to understand its business model and regular practices in the commodities market.
It said its disclosures in 2020 showed the platform allowed for buyers and sellers to finance trades using extended credit terms, typically through receivables purchases, as well as through lending from external financing providers.
Financing “includes both loans and trade credit”, including situations where a seller acts as financing provider to its buyer, it said.
Triterras added that the heavy involvement of Rhodium-related traders was disclosed to investors at the time, and that Rhodium’s credibility helped bolster the platform’s reputation and grow its customer base.
Meanwhile, Koneru’s lawsuit against the SEC alleged that the regulator has violated the US Anti-Deficiency Act by filing a non-emergency lawsuit during the government shutdown, and that the complaint should be set aside.
“Triterras spent tens of millions of dollars cooperating with the SEC and responding to hundreds of inquiries for five years, only for Mr Koneru to face a reckless prosecution by staff who flouted federal law to file a baseless action,” said Jim McCarthy, a spokesperson for Koneru and principal at CounterPoint Strategies.
