Vector fund connects Harvard, CalPERS money to Caribbean payday loans at 600%

Alex Slusky was under pressure to put the money in his private equity fund to work.

The San Francisco technology financier had raised $1.2 billion in 2007 to buy and turn around struggling software companies. By 2012, investors including Harvard University were upset that about half the money hadn't been used, according to three people with direct knowledge of the situation.

Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600% interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Mr. Slusky's fund, Vector Capital IV, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector Capital and the former Cane Bay employees. One ex-Vector employee said the private equity firm didn't tell investors the company is in the payday lending business, for which borrowers repay loans out of their next paychecks.

Vector closed fund IV in July 2007 at $1.2 billion, and investors included Harvard Management Co., which runs the $32.7 billion Harvard University endowment, Cambridge, Mass.

Harvard, which was cited in a 2007 Vector news release as a “significant new investor” in the fund, declined to comment, as did other investors including the Massachusetts Institute of Technology, the John D. and Catherine T. MacArthur Foundation and pension funds in California, Oregon and Maryland.

The Vector Capital IV fund that eventually bought into Cane Bay was raised in 2007 to invest in established technology companies, according to a news release. The $302 billion California Public Employees' Retirement System, Sacramento, committed $25 million to the fund, its website shows. It joined Harvard's endowment, MIT's pension fund and other foundations, according to tax returns and Vector's news release.

Cane Bay was an unusual investment for Vector, which Mr. Slusky started in 1997 as a spinoff from the billionaire Ziff brothers' money management firm, where he oversaw technology deals. He founded the firm just five years after graduating from Harvard Business School as a Baker Scholar, the school's highest honor.

Vector, which makes only a few investments a year, struggled to find enough companies to buy for the new fund, according to the three ex-employees. It bought an English fleet management software maker in 2010 and invested in Technicolor SA, a French digital video company.

By 2012, Harvard was trying to pull out its money because of the investment delays, two people with direct knowledge of the matter said.

The former Vector employees said when they discussed Cane Bay internally they were clear it was in the payday lending business. Unlike other deals, the investment wasn't announced in a news release or listed on Vector's website.

Regulators intensified their scrutiny of Internet lenders soon after Vector invested in Cane Bay. The Justice Department and other agencies started pressuring banks in 2013 to stop processing payments for payday lenders as part of an anti-fraud campaign called Operation Choke Point.

Vector's investment in Cane Bay shows the continuing allure of the payday loan business, even after most states from California to New York restricted or banned it to protect consumers. The crackdown has driven borrowers online. Internet payday lending in the U.S. has doubled since 2008 to $16 billion a year, with half made by lenders based offshore or affiliated with American Indian tribes who say state laws don't apply to them, according to John Hecht, an analyst at Jefferies Group LLC in San Francisco.

Ronn Torossian, a spokesman in New York for Cane Bay, said the company provides services to financial firms and doesn't make payday loans.

“Cane Bay Partners is a management consulting and analytics company,” Mr. Torossian wrote in an e-mail. “In the past, the owners held minority positions in some licensed short-term lending businesses, which are no longer in operation.”

Mr. Slusky, who founded Vector and is its chief investment officer, didn't respond to e-mailed questions and hung up when reached on his mobile phone. David Baylor, Vector's chief operating officer, denied that the firm had misled investors.

“Any implication that we have not provided complete and accurate information to our investors about one or more of our investments is false,” Mr. Baylor wrote in an e-mail.

Regulators who have gone after payday lenders said in interviews they hadn't heard of Cane Bay. Jim DePriest, deputy attorney general of Arkansas, said most of the payday loan stores in his state closed in 2010, when voters passed a ballot initiative capping interest rates at 17%. That's when he started getting more complaints about Internet lending.

One of the websites that Mr. DePriest said he discovered making illegal loans was CashYes.com. A borrower had told his department that CashYes was calling her to collect more money after she had already paid $3,193.75 on a $775 loan.

Mr. DePriest sent a cease-and-desist letter in 2012 to the company, which lists a Belize City address on its website. CashYes replied that it would stop lending in Arkansas, though it maintained state laws didn't apply. At least three other states sent similar letters. Mr. DePriest said he wasn't able to identify the principals or trace CashYes beyond its Belizean parent, Hong Kong Partners Ltd.

Two thousand miles from Arkansas, on an island east of Puerto Rico, David Johnson, Kirk Chewning and Richard Clay set up Cane Bay in 2009, Virgin Islands corporate records show. The company, named for a palm-tree-lined beach near its offices, took advantage of incentives that offer as much as 90% off corporate and personal income taxes.

From a red shuttered building across from an old Danish fort, Cane Bay's programmers, marketers and data analysts run CashYes.com, CashJar.com and at least four other payday loan websites, the former employees said. Cane Bay registers the domains, designs the sites, approves the loans and analyzes the returns to adjust algorithms, according to the ex-employees.

The loans were made by companies incorporated in Belize, a Central American country that lets foreigners set up entities that don't pay local taxes or disclose ownership. When a state barred one site, Cane Bay would direct customers to another, according to the former employees.

The ex-employees said Cane Bay had no business other than running the payday loan websites and that Messrs. Johnson and Chewning directed operations for all of them.

Messrs. Johnson and Chewning referred questions to Mr. Torossian, who said the men wouldn't agree to an interview. Neither the Belize companies nor the websites returned calls seeking comment.