(Bloomberg) -- In the weeks before the Fyre Festival, organizers borrowed as much as $7 million in a last-minute bid to fund the doomed Bahamas music showcase, according to documents reviewed by Bloomberg News.
While recriminations and lawsuits multiply over the event’s now-infamous collapse, almost $1 million is still unaccounted for, and it’s unclear exactly how the rest was spent. Meanwhile, there’s the open question of whether thousands of ticket-holders will get refunds, or if employees of the startup behind the festival, Fyre Media Inc., will be fully paid.
The first wave of litigation, including a $100 million class action, came from vendors and attendees of the event that was to begin late last month. Now come demands from backers looking to recoup their investment—funding that in one case was directly connected to how much attendees spent on such extras as tours, booze, and “upgrades.”
Fyre Festival organizers took out a $3 million loan from a New York firm run by Ezra Birnbaum. Listed as a “member” of EHL Funding LLC, Birnbaum is now suing the festival’s organizers for defaulting. A second loan, for as much as $4 million, was tied to Carola Jain, the wife of prominent Wall Street executive Bob Jain, co-chief investment officer of the $35 billion hedge fund Millennium Management.
Birnbaum’s loan was to be repaid with money Fyre received for festival-related purchases, such as tickets and funds added to electronic wristbands meant for on-site digital payments. Fyre was to fork over at least 40 percent of what it received this way, or by other electronic means, according to a copy of the promissory note. Around the time organizers took out the loan from Birnbaum, himself tied to a now-settled U.S. Securities and Exchange Commission fraud suit, ticket-holders began receiving emails encouraging them to put hundreds of dollars on their “FyreBands” to use for buying items and services such as extra beach tours and boat rentals. The festival received more than $700,000 from festival-goers for use via the wristbands–funds that were never repaid to Birnbaum, according to his complaint.
In theory, the odd arrangement kind of made sense. The Fyre Festival was advertised as a luxe vacation in the tropics, an exotic music festival with villas, yachts, fancy food, and celebrities on Great Exuma island, so there should have been plenty of ticket sales and VIP dollars to repay the loan. But guests didn’t arrive at the promised, fantasy island. Instead they discovered a lack of facilities, poor lighting, and inadequate accommodations. The gourmet meals were sandwiches and pasta salad, and the posh housing was glorified disaster relief tents. Many attendees were stranded through the night on the unfinished, unlit site, or crammed into an airport terminal waiting for a flight out.
In short, ticket holders scrounging for food, shelter, and a way off the island weren’t spending the kind of money on extras organizers needed to pay back Birnbaum.
Potential 120% Interest Rate
Despite its now permanent association with the Bahamas disaster—which Slate magazine called the worst festival failure since Altamont in 1969—what Fyre Media actually does is makes an app. Founded in 2015 by musician Ja Rule—real name: Jeffrey Atkins—and his business partner Billy McFarland, Fyre held the festival as a side project to hype its brand and the app. That primary product is an electronic platform to book talent for concerts, clubs, or parties. Current and former staff said McFarland gave them the impression the app was well funded, even attracting the interest of media giant Comcast Corp.
But as the festival meant to introduce the Fyre brand approached, the company was already taking on substantial debt.
On April 10, less than three weeks before the event, EHL Funding made a multimillion-dollar loan to fund the Fyre Festival, according to a copy of the promissory note filed in connection with a lawsuit. The firm shares a Manhattan address with Birnbaum, who identifies himself as a “member” of the business in a signed verification included in the court complaint. EHL also sued Atkins and Robert Nemeth, managing director and head of research at Perkins Fund Marketing, a Southport, Connecticut-based broker-dealer. Nemeth guaranteed EHL’s loan to McFarland, according to court papers and filings made under the Uniform Commercial Code.
The interest on the loan amounted to $600,000 over three months, but only if Fyre met a trio of stipulations. It needed to make a payment of $500,000 within 16 days, make each subsequent payment on time, and raise the company’s valuation to more than $75 million. If any of these terms weren’t met, interest charges would total $900,000, a penalty that would make for an effective annualized rate of 120 percent. Neither Birnbaum nor an attorney for EHL replied to requests for comment.
Achieving a particular valuation is an unusual requirement for this kind of loan. At the time it was made, McFarland was in discussions with the venture capital arm of Comcast as he searched for additional backers. Comcast Ventures, which was considering backing Fyre’s app—not the festival—declined to invest days prior to the festival after issues arose during due diligence, according to a person familiar with the negotiations.
Should the deal have gone through, Comcast would have injected $10.5 million into Fyre, in addition to $4.5 million from new and existing investors, according to a copy of the term sheet reviewed by Bloomberg. The document, dated March 21, showed that Fyre was claiming a $90 million pre-money valuation.
The repayment of EHL’s loan hinged heavily on wristband payments. The FyreBands allowed attendees to buy boat rides, massages, tours, and other extras during the event. When the festival was first advertised, attendees were told they could make purchases using cash and credit cards. On April 17, just days after the festival took EHL’s $3 million loan, organizers sent an email to ticket holders asking them to activate their FyreBand.
The email, a copy of which was reviewed by Bloomberg, said the festival was now cashless and vendors would take only payment using the bands. “We recommend adding at least $300-$500 per day,” the email stated. It promised unused funds would be refunded, save for a $10 “refund handling fee.” Several attendees have since sued, alleging they haven’t gotten their money back.
As the event loomed ever closer, some half-dozen emails were sent to attendees urging them to load more money onto the bands. While one message claimed April 24 was the last day to add funds, another sent on April 26, just one day before attendees began arriving in the Bahamas, said the company reopened the ability to add funds because of “anticipated lines” at the festival. It once again suggested $300 per day be added, which amounts to about $900 for the typical attendee.
When money was deposited on these bands, EHL was due at least 40 percent of it under the terms of the loan. The lender was paid $108,400 between April 18 and 21, purportedly based on the wristband funds, then never again, the lawsuit alleges. EHL claims another $760,000 was collected through FyreBand payments, but just as attendees say they were never refunded their unused FyreBand money, the portion of those funds owed to EHL was never paid, either.
This leaves three-quarters of a million dollars unaccounted for, along with questions about how as much as $7 million in loans were spent on a festival that never was.
Fyre was banking on that money, according to a now-former employee who requested anonymity. As the emails to attendees show, the organizers didn’t start marketing the festival as cashless until around the time of the April loan, the person said. Indeed, an email sent to ticket-holders on April 2, before the EHL loan, makes no mention of the digital payment wristbands.
McFarland and Atkins didn’t return emails seeking comment on the loans or the internal discussions. Court dockets in the lawsuits against Fyre have yet to list defense counsel, and an attorney who previously represented Fyre Festival said he no longer worked for the company.
Nemeth, who guaranteed EHL’s $3 million loan, began advising Fyre in January, according to a filing with the Financial Industry Regulatory Authority. He worked some 10 hours a week to “provide introductions and general advisory in support and promotion of the business.” Nemeth didn’t respond to multiple messages seeking comment. Gilman “Chip” Perkins, founder and managing partner of his employer, Perkins Fund Marketing, said his firm “has nothing to do with the Fyre Festival.”
Tapping Into the Hamptons
Another festival backer with ties to Wall Street, Carola Jain, may be next to seek return of an investment she helped organize.
Jain, who according to her LinkedIn page is a senior director for InterBrand, had invested in Fyre Media, the Comcast Ventures term sheet revealed. In fact, she’s listed in a separate document as an agent for a loan of up to $4 million. Her husband, Bob Jain, is a veteran banker and money manager who also is a member of the board of directors at Harvard Management Co., Harvard University’s investing arm. Because a financing statement lists Carola Jain as an agent, rather than as a lender, it’s unclear whether she provided the funds or if she collected them from others to lend to McFarland.
At a gathering in the Hamptons last summer, Jain introduced McFarland and Atkins to others in attendance, including a journalist. She said she invested in McFarland’s first company, Magnises, a social club and credit card of sorts. Jain even held a holiday party for the company at her townhouse on Manhattan’s Upper East Side in December, according to the former Fyre Media employee.
Carola and Bob Jain didn’t respond to multiple requests for comment, nor did Millennium.
McFarland has been silent about how the debt he took on was spent, but internally he has recently acknowledged the breadth of legal actions against him.
According to a recording of an internal conference call reviewed by Bloomberg, McFarland said Fyre employees had to preserve all company files and emails. The former Fyre Media employee said the call occurred on May 5, just days after the festival.
Employees on the line press McFarland about the company’s failed attempt to receive funding from Comcast Ventures, and one claims McFarland had previously said the money would be on its way within seven days. McFarland concedes on the call that the company didn’t close its funding deal with Comcast.
He told employees that they’d be paid for work performed until that day, but couldn’t guarantee they’d be paid for future work. That provoked grumbling, with one employee asking whether they had just been fired. McFarland said no, prompting criticism from another who said the company’s move would effectively force employees to quit, preventing them from receiving unemployment benefits.
“If you’d like to stick it out with us, that’s great,” McFarland said on the call. “If you’d like to resign, I’m sorry, and I totally understand.”
—With the assistance of Zeke Faux, Chris Dolmetsch, and Amanda Gordon in New York.