NEW YORK (Reuters) - New York Attorney General Letitia James sued the cash advance provider Yellowstone Capital for $1.4 billion on Tuesday, saying it ran a large-scale predatory lending operation that charged "sky-high" interest rates on fraudulent loans.

The complaint accused Yellowstone, now known as Delta Bridge Funding or Cloudfund, of falsely stating they would buy specified percentages of merchants' future revenue, known as receivables, while giving merchants the flexibility to pay off advances over longer periods if business slowed down.

James said the defendants instead debited fixed sums from merchants' bank accounts over short periods, typically 60 or 90 business days, resulting in "unconscionable" effective interest rates that regularly reached triple digits and have hit 820%.

New York's maximum interest rate that isn't considered usurious is 16%.

James said City Bakery, a former Yellowstone customer near Manhattan's Union Square, closed after 29 years in business in 2019, felled by huge debts to the company and a surprise increase two years earlier in its payment obligations.

Lawyers for Yellowstone and Delta Bridge did not immediately respond to requests for comment on behalf of the 37 corporate and individual defendants in James' 281-page complaint.

The lawsuit filed in a New York state court in Manhattan seeks to recoup illegal interest and fees, impose a $5,000 civil fine for each fraudulent merchant cash advance, and ban Yellowstone co-founder David Glass from the industry.

Five individual defendants settled for $3.37 million and accepted industry bans, James said.

"Small businesses are the foundation of our economy," James said. "They face severe challenges without also having predatory lenders taking advantage of them."

Glass and co-defendant Yitzhak Stern co-founded Yellowstone in 2009, the year after Glass pleaded guilty in an insider trading case. He was sentenced to probation.

In 2021, Yellowstone agreed to pay $9.8 million to settle U.S. Federal Trade Commission charges it made unauthorized bank withdrawals and misled businesses about its financing.

Last December, Yellowstone agreed to pay $5.6 million and forgive $21.8 million of debt to resolve claims by New Jersey's attorney general that it deceived businesses.