Securities Law Blog

Talk radio “Money Man” Daniel Frishberg was charged with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm, Daniel Frishberg Financial Services (DFFS).

According to the Securities and Exchange Commission’s complaint, Frishberg advised clients to invest in notes issued by Business Radio Networks (BizRadio), where he hosts his own show under the nickname “The Money Man.” A reported $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg’s associate Albert Fase Kaleta. Frishberg allegedly permitted Kaleta to recommend the notes to DFFS clients, without disclosing BizRadio’s poor financial condition or that proceeds from the note offerings funded Frishberg’s salary as BizRadio talk show host.

Frishberg will be barred from future association with any investment adviser and has agreed to settle the charges by paying a $65,000 penalty that will be distributed to harmed investors

Former pastor and founder of the Fraud Discovery Institute has been charged by federal prosecutors with conspiracy to commit securities fraud by reportedly circulating false information in 2009 about home builder Lennar Corp.

According to the complaint filed by the U.S. attorney for the Southern District of Florida, Barry Minkow along with a person identified as Conspirator A, conspired to “artificially manipulate and depress Lennar’s stock” in an effort to pressure the builder to pay money allegedly owed to Conspirator A. Minkow was reportedly hired by Conspirator A in late 2008 to assist him in litigation against Lennar. In January 2009, Minkow released a report that alleged widespread improprieties in Lennar’s financial reporting and business plan. After the release of the report, Lennar sued Minkow for libel and extortion, for which Minkow was found guilty.

Minkow became a pastor and founded the Fraud Discovery Institute following a seven year prison sentence for being convicted of stock fraud in connection with the ZZZZ Best scandal in 1988. Then age 21, Minkow was accused of swindling investors out of tens of millions of dollars by persuading them to invest in his carpet-cleaning business, which, when unrolled, proved to be a Ponzi scheme.

Since his prison term, Minkow had worked closely with the Federal Bureau of Investigation and the Securities and Exchange Commission to uncover fraud in numerous companies. The criminal complaint alleged that Minkow used his relationship with federal law-enforcement officials to prompt an investigation into Lennar, and then used his knowledge to bet against Lennar’s stock. If found guilty, Minkow could face a maximum prison sentence of five years.

Three firms and four individuals have been charged with operating a boiler room scheme that raised more than $2.15 million from nearly 200 investors nationwide. The Securities and Exchange Commission (SEC) alleged that Flatiron Capital Partners LLC (FCP) and Flatiron Systems LLC, both managed by David E. Howard II, conspired with Spyglass Equity Systems Inc. and its owners Richard L. Carter, Preston L. Sjoblom and Tyson D. Elliot to defraud investors who they persuaded to buy purportedly profitable trading systems.

Spyglass allegedly cold-called investors pitching trading systems that could only be used if the investor also funded a brokerage account at FCP. FCP was not however a broker-dealer and could not offer brokerage services to its customers. According to the SEC complaint Spyglass made numerous false and misleading statements to investors about the successful reputation that FCP had in the brokerage industry. To sweeten the deal, Spyglass reportedly offered investors a money-back guarantee if the system did not generate a profit within the first 180 days of trading. However, investors were first required to pay Spyglass a license fee of about $6,000 to be put in contact with Flatiron to open a “brokerage account.”

According to the complaint, within an investor’s instructions on how to fund their account with FCP, Howard and FCP also included the FCP Operating Agreement which indicated that the investor was actually purchasing a security interest in FCP. Many of the investors recruited by Spyglass were elderly and unsophisticated investors who did not understand they were purchasing a security interest in FCP.

Investor funds were reportedly pooled to enable Howard and others to trade the funds using various trading techniques. To avoid having to pay refunds to clients when the trading proved unsuccessful, Howard devised another trading system and organized FS to operate the new system. Spyglass allegedly persuaded investors to transfer their investments from FCP to FS by claiming success with the new trading systems and investors were again misled into opening a brokerage account with FS that was actually a security interest in the firm.

In 2008 when FS ran out of funds, Howard allegedly tried to conceal the scheme by telling members that he had ceased trading in order to conduct an audit of the trading accounts, according to the SEC complaint. However, there are no records that an audit was ever performed.

Throughout the course of the fraudulent scheme, only a little more than half of investor money was reportedly used for trading purposes. The SEC’s complaint filed in the Central District of California claims that Howard misused almost $500,000 of investor money for unauthorized business expenses as well as personal expenses including travel, entertainment, and gifts for his girlfriend.

Dallas, Texas Judge W. Royal Furgeson Jr. did not approve the $21 million class action settlement between Securities America Inc. and former clients suing the firm over the Reg D offerings from Medical Capital Holdings, Inc. and Provident Royalties LLC.

Part of the proposed settlement was to determine if Securities America clients could continue their individual arbitration claims over the failed private placement investments, or if they would be required to drop their claims and join the class action.

Judge Furgeson’s previous decision to temporarily halt legal actions brought by Massachusetts, Montana, and individual arbitration claims, while he decided on the proposed settlement, received much criticism. The North American Securities Administrators Association Inc. (NASAA) blasted the judge’s decision in a legal brief it filed in a Dallas federal court.

In its brief, NASAA argued that “the request by the [class action] plaintiffs to enjoin the state regulators will not only terminate the efforts of the Massachusetts and Montana regulators, but it will have a chilling effect on all state securities regulators in that, despite their clear statutory authority to take steps necessary to police illicit conduct in their states, they potentially face having that authority impaired by defendants who would run to federal courts to plead poverty.

With Securities America reportedly spending $1.5 to $2 million each month on legal fees, Securities America Chief Financial Officer testified that if the settlement wasn’t approved, the firm “could go bust” soon due to defense costs and arbitration awards.

Arriving at his decision to deny the proposed settlement, Judge Furgeson focused on Securities America’s business model and its relationship with its parent company, Ameriprise Financial Inc. Judge Furgeson reportedly reviewed how Ameriprise benefited from positive revenue growth at Securities America and the movement of money between Securities America business entities and Securities America and Ameriprise entities.

Judge Furgeson’s decision pushes the class action lawsuit, Billitteri v Securities America et al., back to the U.S. District Court in the Central District of California. The case was moved to Dallas because Judge Furgeson is overseeing the class action claim against Securities America and other broker-dealers that sold Provident Royalties investments.

The Securities and Exchange Commission’s Division of Enforcement announced insider trading charges against Rajat K. Gupta for allegedly providing Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information. Gupta, who has served on the boards of directors at Goldman Sachs and Procter & Gamble, is accused of sharing confidential information with Rajaratnam which he learned during board calls and in other aspects of his duties on the Goldman and P&G boards.

The SEC’s complaint alleges that while Gupta was a member of Goldman’s Board of Directors, he illegally tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was announced publicly on September 23, 2008. Rajaratnam reportedly acted on the information by arranging for Galleon funds to purchase more than 175,000 Goldman shares. The transaction resulted in more than $900,000 in illicit profits when Galleon sold the shares the day after the information became public.

Gupta also allegedly illegally disclosed inside information to Rajaratnam about Goldman’s positive financial results for the second quarter of 2008 and of Goldman’s negative financial results for the fourth quarter of 2008. The advance notice generated more than $13.6 million in illicit profits for the Galleon funds when the funds liquidated its holdings the day after the positive financial results were announced, and allowed them to avoid losses of more than $3 million by selling the funds Goldman holdings before the negative announcement was made.

As a P&G board member, Gupta allegedly telephoned Rajaratnam following a telephonic meeting of P&G’s Audit Committee on January 29, 2009, and disclosed that P&G’s expected organic sales would be less than previously predicted for the quarter ending December 2008. Galleon funds then sold short approximately 180,000 P&G shares, reaping more than $570,000 in illicit profits.

Gupta has not been charged in the criminal case in which 19 of 26 defendants have pleaded guilty to participating in an insider trading scheme involving Galleon.