For the last two years the SEC has retooled the enforcement program which is critical to its mission. One goal has been more efficient, effective and speedier investigations. Since concluding the reorganization of the division the Commission has touted the success of those efforts, pointing to various statistics and a series of selected cases to suggest that the program in on track to return to its glory years.
The statistics are impressive (here). More cases were filed last year than the year before. Some statistics suggest the program is more efficient which, in these days of tight budgets, are sure to please those on Capitol Hill. As even Commission officials admit however, statistics are only part of the story. What is really happening on the ground? A case filed last Friday and a related action brought in 2009 suggest the answer.
On Friday the Commission filed SEC v. Frishbert, Civil Action No 4:11-cv-0197 (S.D. Tx. Filed March 25, 2011). The action names as a defendant, registered investment adviser Daniel Sholom Frishberg, a principal of Daniel Frishberg Financial Services (“DFFS”). The complaint centers on the sale of notes from two issuers to advisory clients. The first involved the sale of notes of Business Radio Network L.P., a private equity fund known as BizRadio, from April 2008 through September 2009. About $5.5 million was raised from DFFS clients. The sales were solicited by Albert Kaleta with the approval of Mr. Frishbert. Note purchasers were not told that Mr. Frishberg is the CEO and Mr. Kaleta is affiliated with the company. They also were not told that both men drew a salary form the company or that is was in poor financial condition and it lacked the resources to repay the notes.
The second involved the sale of notes issued by Kaleta Capital Management, Inc. (“KCM”), a company controlled by Mr. Kaleta. Again Mr. Frishbert permitted a solicitation of DFFS clients. All representations regarding the notes were oral – there were no written materials. Again investors were not told about the poor financial condition of the company. In an earlier actions (described below) the Commission alleged the sales representations were false. The complaint alleges violations of Advisers Act Sections 206(1) and (2). Mr. Frishberg settled by consenting to the entry of a permanent injunction prohibiting future violations of Section 206(2) and from aiding and abetting violations of Sections 206(1) and (2). He also agreed to pay a civil penalty of $65,000.
In 2009 the Commission filed SEC v. Kaleta, Civil Action No. 4:09-cv-3674 (S.D. Tx. Nov. 13, 2009). The case names as defendants Albert Kaleta and his company KCM. DFFS and BizRadio, were named as relief defendants.
The complaint centers on the same facts and fraudulent note offering which is part of the Frishberg complaint. BizRadio was loaned $5.5 million of the investor funds. Another $1.6 million was loaned to DFFS. Mr. Kaleta took part of the money for himself. Both Mr. Kaleta and Mr. Frishberg drew salaries from BizRadio. Neither entity had the ability to repay the loans according to the Commission meaning the investors’ money was all but lost probably from the beginning. The case was settled with the entry of a consent injunction prohibiting future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act as well as Sections 206(1) and (2) of the Advisers Act. A receiver was also appointed. As part of the relief the Commission sought the repayment of the loans made to the relief defendants.
Before Kaleta was filed in 2009 the Commission undoubtedly conducted an investigation. A comparison of the 2009 and 2011 complaints demonstrates that they are based on the case core facts. Presumably Mr. Frishberg continued to operate his investment adviser business during the many months between the first and second case which finally barred him from the business. Yet that business was at the center of the alleged fraud.
In the end, these two cases, like the statistics, do not tell the whole story of the enforcement program. At the same time they raise significant questions about efficiency and effectiveness.