BizRadio: An Interview with David Wallace about the Dan Frishberg – Al Kaleta fiasco!

As I pen this latest blog entry I am reminded that it has been several months since I was first told by a friend in Houston that, as he put it, “We have our own little Madoff in play here in Houston.”  At the time I wasn’t sure what he was referring to, but now, after several months have past I have come to see an amazing story unfold – the rise and fall of BizRadio with Dan Frishberg at the helm.

Like any good story there are twists and turns and if there is one thing that is for sure – this story isn’t over.

One thing however that has perplexed me is how someone with David Wallace’s reputation could end up being caught in the web of deceit and lies that has come, from the investment community, to be known as BizRadio – now affectionately referred to as “the sound of your money going!”  Many an investor invested in private equity funds only to find out that their investments went into what seems to have been a never ending money pit known as BizRadio.

Not that BizRadio was destined to fail – quite the contrary – under effective management BizRadio could have been a success (well maybe).  But, few today, with hindsight being 20/20, would say that Dan Frishberg and/or Albert Kaleta represented effective management.  In fact, it appears that their motivation was self-serving and that BizRadio was their mouthpiece for attracting investment monies and was nothing more than a “loss leader” designed to fund their RIA and personal gain.

David Wallace, on the other hand, has enjoyed success in politics and business.  Yet, his name has been tarnished due to his involvement with Dan Frishberg, Al Kaleta and BizRadio.  And, as I have followed this story, I have come to wonder about David, his involvement and mostly wonder if David Wallace got (as I put it) sucked into Dan Frishberg’s vision of the illusion he created called BizRadio.

Based on my past and understanding of people…I believe that acceptance of responsibility and transparency can lead to nothing but good.  Therefore, I asked David Wallace several weeks ago if we could have a conversation about this whole BizRadio business.  Like with Dan Frishberg, I suggested to David that I would be willing to send him my questions in writing.  I assumed that if I were willing to be transparent in my intentions and questions, David might be willing to participate with his answers.

Below are the questions and answers David provided me.

1. You have established several investment funds.  When did you first begin your focus as a “general partner” for private equity funds?

DW Responds – I have been involved in real estate and private equity investing since 1982.

2. How did you first attract your investors?

DW Responds – Generally, all of the various investments have been through Reg D Private Placements. Generally, all of the investors have been Accredited, High Net Worth investors.

3. What investments were the fund investments to be invested in?  By the way, these questions may produce answers that are before your involvement with BizRadio and Dan Frishberg (I don’t know).

DW Responds – The various Investment Funds (since 1982) have had different target investments. Some real estate, some private equity, some turn-around, some combination of each, etc.

4. Was the Wallace Bajjali Development Partners one of your first funds?

DW Responds – No

5. Were any of the Wallace Bajjali funds (assets) invested in BizRadio?

DW Responds – Yes. Wallace Bajjali has been involved in three separate investment funds. These funds have invested in about 25 separate real estate transactions, and 2 private equity transactions. Some of the real estate transactions are mixed use in nature, so for each asset, there may be four or five separate developments, i.e. on one of our tracts of land we are developing Assisted Living, Independent Living, Age-restricted patio homes, Memory Care Facility, etc. One of the private equity investments was BizRadio.

6. If so, what percentage of the fund assets (not based on appreciated property, but based on cash invested) was invested in BizRadio?

DW Responds – We structured several transactions where we were able to get a co-investor (to our fund) to provide equity capital for a transaction, which in some cases, eliminated our requirement to come up with significant capital. In short, we did not have to come up with all of the equity, yet still received the majority of the equity upside. Based on the three funds that Wallace Bajjali was involved, and when including this co-investment equity for the benefit of the funds, about 15% of the equity capital was invested into BizRadio. Excluding the co-investment equity that we raised, about 25% of the equity was invested into BizRadio.

7. When did you first come to know Al Kaleta (assuming you knew him)?  How did you come to know him?

DW Responds – I think I first met Al Kaleta around 2000 through a mutual friend. I believe I met him through a service organization (I was the president of the Sugar Land Exchange Club).

8. When and how did you first come to know Daniel Frishberg?

DW Responds – I had a pretty bad accident (a drowning) in 2001. I was on life support, in a coma, etc. for a while, and following about a 6-month recovery, I was introduced to Dan Frishberg when he wanted to interview me on the radio about my drowning experience, and more importantly, the power of prayer in a community.

9. I have been told that your office in Houston was across the hall (I haven’t been there David so my characterization may be inaccurate) from Dan’s BizRadio, but you weren’t seen much in his office.  Considering your funds – certainly from what I’ve been told the Laffer, Frishberg, Wallace Economic Opportunity Fund had substantial interest in BizRadio – were you active in the operation?  If so, how?  If not, why?

DW Responds – I was approached by Al when we were creating a real estate investment fund in about 2005. AL Kaleta and Daniel Frishberg indicated that they have some clients that they wanted to allocate some of their funds into real estate, and they liked our team, track record, etc. So their firm ( Frishberg , Jordan & Stewart Advisors at the time) provided some investment capital (about 70%) on the first Wallace Bajjali affiliated fund. This fund acquired 13 real estate properties. As we started to look at creating a second fund, we prepared a $10 million offering prospectus and Daniel Frishberg and Al Kaleta indicated that they felt that they could raise the capital for the fund. At some point a discussion ensued about the convenience of Wallace Bajjali leasing space on the same floor as Frishberg , Jordan & Stewart, such that if their clients would like to meet the principals, then we would be more accessible, than if we were in another location. Ultimately, the second fund was amended to raise beyond the $10 million, and up to $25 million.

10. By the way, how did the L, F, W, Economic fund… get connected with funneling (investing) money into BizRadio?

DW Responds – At the time of creation of the LFW Fund, and when the dollars were invested, the strategy appeared to have merit and the intent was for the LFW Fund to realize a reasonable return.

11. What was LFW promised that would cause it to invest so heavily in BR?

DW Responds – The investment was based on the investment returns that were being promised by the then-current management team.

12. I have been told that Dan used BizRadio to expand his investment reach and increase his assets under management.  Would you agree with that characterization?  If not, tell me your perception of BizRadio under Dan’s direction?

DW Responds – Around the 4th quarter of 2008, and continuing into the 1st quarter of 2009, it became obvious based on conversations with BizRadio employees, and ultimately Daniel Frishberg, that this was the case. At this time I worked with the existing employees of BizRadio to create a restructuring plan and “Path to Profitability” (that was provided to Daniel Frishberg and Al Kaleta) to eliminate the operating losses, but more importantly, to eliminate any conflict of interest between the RIA and BizRadio. Although there was an outward appearance that it was being well received and implemented, in the end, I feel that it was summarily dismissed.

13. As you know there are folks (investors) who feel that their dollars were misguided or misapplied (one called it funneled) into a money losing proposition called BizRadio and they feel that they were scammed.  Looking back, do you feel that they were scammed?  BY THE WAY, I KNOW THIS IS A TOUGH QUESTION.  And if so, were you scammed into directing money into BizRadio?

DW Responds – I continue to feel today that the BizRadio strategy can be a good strategy, as long as there is no conflict of interest and as long as you have good management execution. For example, having the RIA, Online Trading Academy, radio station, station content company, etc. all UNDER ONE UMBRELLA ENTITY, makes a lot of sense. Therefore, there is no opportunity for conflict of interest. This is the structure that we recommended during the 2008-2009 timeframe. However, based on the conversations that we have had (over the past 18-months) with numerous investors, BizRadio employees, stakeholders, etc., I am not certain that the investor’s interest (initial investors, our fund investors, and other lenders to BizRadio) were placed in the highest fiduciary role by the BizRadio senior management team.

14. You are respected as a smart young man.  My gut tells me you were scammed.  Do you feel that you’ve been had?

DW Responds – I am not going to comment on the level of intelligence, but suffice it to say that there are countless investors that have invested millions of dollars (alongside our funds) based on a strategic plan, BizRadio offering documents, story, revised strategic plan, etc., etc., and all of us are having to reserve for 100% of the investment that we made into BizRadio. It is a shame for a strategy that should have worked, if it were not for poor execution. I am certain that the SEC (or other governmental agency) will determine the motivation of the BizRadio senior management team. I will leave it up to them to determine if people were misled or “scammed” as you put it. Nevertheless, please keep in mind that the Wallace Bajjali back-end interest only kicks in following certain IRR thresholds to the investors. A write off of BizRadio has a tremendous economic hit to all concerned.

15. There is an SEC investigation that goes well beyond Albert Kaleta.  Do you feel that your financial connection with Dan Frishberg Kaleta in any way taints you as a General Partner in this private equity funds? and/or Al

DW Responds – Frishberg , Jordan & Stewart Advisors (and ultimately Frishberg & Kaleta) raised capital and had their investors allocate a portion of their capital into three of our investment funds. In many respects, we were one of several investments that these investors made at the recommendation and advice of their financial advisor. We believed in BizRadio and, for quite some time, trusted Dan Frishberg. We were disappointed in his conduct, and continue to be surprised at the extent to which he misled us and others. Having said that, the connection by our investment into BizRadio, does not represent our finest investment hour. We continue to focus our time and energy on realizing some return of our investment in BizRadio, and to maximize our return on the remaining 20 or so real estate properties.

16. Has the SEC sought your input into their investigation?

DW Responds – Yes.

17. Do you feel that you are under investigation by the SEC or any other governmental agency?

DW Responds – No, but I am helping them in their investigation.

18. What was Dan Frishberg’s plan (long range) for BizRadio (before the SEC busted Kaleta)?

DW Responds – The most recent plan I have heard about is that the company was looking to establish a relationship with Salem Communication to roll out the BizRadio concept into other markets. As these markets are established, then other services (RIA, Online Trading Academy , etc.) that would be owned by the overall company would benefit.

19. Do you think that Dan was capable of executing that plan and creating a successful business enterprise in BizRadio?

DW Responds – Early on, I believed in the plan and thought it had merit. I was convinced by Dan Frishberg, as were countless others, that he had the experience and the ability to execute the plan. As time passed, I assumed that he could surround himself with others having experience to execute the plan. Yet ultimately, many of these experienced folks were terminated or dismissed for numerous reasons. As time passed further, I felt that by bringing in Salem to take over all of the station operations, by having the CEO of Online Trading Academy take over numerous operations, etc., and to eliminate the operational deficiencies of the senior management team, I felt that it could be recovered. In the end, that would not work out either.

20. What role do you feel that Elisea Frishberg played in the success or downfall of BizRadio?

DW Responds – I am not sure what she contributed; it was my belief that her salary should have been reduced or eliminated as part of an overall expense reduction that Dan Frishberg promised to implement, at least in large part, but ultimately never did.

21. I can’t begin to tell you how many former employees have reached out to share their experiences while at BizRadio.  Was it that difficult a place to work?  If so, how?

DW Responds – It should not have been, but it became that way. I would defer to the employees’ comments to you, which sound like what I heard as I began to voice my own criticisms in mid- to late 2008.

22. Many investors who have (or feel that have) lost tens of thousands or hundreds of thousands hold you partially responsible for their loss.  In your opinion, is there a loss?  If so, do you feel responsible?  And, what plan of action is there to make the investors whole?

DW Responds – We made an investment based on the best information available to us at the time. Needless to say, things have changed dramatically while we were invested in BizRadio. We have made the decision to reserve 100% of our BizRadio investment as of December 31, 2009. Although we cannot control the economy, capital markets, etc., we do anticipate that the real estate investment returns should provide a full recovery of the investment capital to the investors.

GALLAGHER COMMENTS: After reading David’s answers I was still a bit perplexed.  I remember the movie “Forrest Gump” and the line where he says, “I’m not a smart man…”  Well…I’m not the sharpest knife in the drawer, but some things just don’t add up.

Let’s see…one raises money for lets say a major real estate investment.  The funds you raise are coupled with legitimate debt and you buy the property.  The assumption is as follows:  (1) you lease the property so that the lease payments pay the debt; (2) the property rises in value so that when it is sold you have a gain; and (3) the investors reap the reward from the real estate sale and appreciation.

Up till 2008 that seemed to make sense.  Then…well the crash or shall we call it “The Great Recession!”

So, let’s take look for a moment at Wallace Bajjali and what they say on their web site:

Founded by David Wallace and Costa Bajjali, Wallace Bajjali Development Partners, L.P. is a private, real estate investment and consulting firm specializing in a variety of real estate services to investors, developers and institutional owners. Using our extensive development experience, private equity funds and knowledge of public-private partnerships, we can make most projects a reality. Through economic development, we strive to create real value for communities, municipalities and our investors.

More specifically, Wallace Bajjali Development Partners focuses on the development of both commercial land into retail, office, mixed-use and town centers, and residential land into single family communities, student housing, independent living, and assisted living. We endeavor to create a true sense of community throughout all our developments.

Being a bit simple minded, what I don’t see is any reference to Wallace Bajjali investing in anything other than real estate.  But, I am open to the possibility of other investments.  Of course the question arises as to how Al Kaleta and Daniel Frishberg got involved.  David Wallace provides some insight in his answers above:

DW Responds – I was approached by Al when we were creating a real estate investment fund in about 2005. AL Kaleta and Daniel Frishberg indicated that they have some clients that they wanted to allocate some of their funds into real estate, and they liked our team, track record, etc. So their firm ( Frishberg , Jordan & Stewart Advisors at the time) provided some investment capital (about 70%) on the first Wallace Bajjali affiliated fund. This fund acquired 13 real estate properties. As we started to look at creating a second fund, we prepared a $10 million offering prospectus and Daniel Frishberg and Al Kaleta indicated that they felt that they could raise the capital for the fund. At some point a discussion ensued about the convenience of Wallace Bajjali leasing space on the same floor as Frishberg , Jordan & Stewart, such that if their clients would like to meet the principals, then we would be more accessible, than if we were in another location. Ultimately, the second fund was amended to raise beyond the $10 million, and up to $25 million.

Hum…now what motivated Al and Dan to want to direct their clients monies into this new fund.  I have been told by many parties that Al and Dan had a motive that was not – shall we say – transparent.  In fact, I have been told by several reliable sources that Dan and Al wanted to use David as a conduit for funds.  Money laundering if you will – maybe not in the illegal sense, but as a way to redirect assets.

Here’s the example.  If Dan Frishberg, using BizRadio, told folks to invest directly in BizRadio he might have some “explaining” to do or at least he’d have a clear conflict of interest.  On the other hand, if he referred investment clients to David Wallace (who may have been unsuspecting at the time) in exchange for David investing a portion of his fund in BizRadio – Dan would avoid (at least on the surface) any conflicts.  Or…he’d be able to divert funds (my example of money laundering) – investment funds – back into his own pocket and that pocket was called BizRadio.

But the story continues…  David Wallace further stated above:

At the time of creation of the LFW Fund, and when the dollars were invested, the strategy appeared to have merit and the intent was for the LFW Fund to realize a reasonable return.

The investment was based on the investment returns that were being promised by the then-current management team.

As you look above you’ll see these answers provided by David Wallace related to the Laffer, Frishberg, Wallace fund.  Now the investment, as David put it, was “based on the investment returns that were being promised by the then-current management team.”

Still seeking answers I had the opportunity today (April 14, 2010) to talk to David Wallace via the phone.  I must say I enjoyed the conversation and David’s candor in answering my continued questions.  Below you will see my questions, David’s responses and my further comments.

So here’s a new question:  What due diligence did you perform on BizRadio to determine if the investment returns promised were based on historical fact?

DW Responds:  From a due diligence standpoint you really couldn’t have looked at a lot of historical numbers cause in the case of Houston and Dallas they were relatively young companies.  As it relates to the strategy itself, as I mentioned in some of my responses, I think the business strategy itself could be sound.  I think the concept of having ownership in the content of bringing hosts on – like an on-line trading academy – they’re connecting with the listener and there are additional products and services they can sell.  I think to the extent that you can capture that revenue where its just not a one time revenue of this is how much someone is going to pay for an hour slot – but there are also other profit opportunities – again I think it was a very sound business model.

As I looked at the due diligence, the analysis and the industry – where things were headed in the terrestrial radio industry – I thought there were some good opportunities there – as did hundreds of other investors.

Beyond the due diligence issue there are some other pieces to this puzzle that just don’t seem to fit.  David stated, in part above:

I began to voice my own criticisms in mid- to late 2008.

Around the 4th quarter of 2008, and continuing into the 1st quarter of 2009, it became obvious based on conversations with BizRadio employees, and ultimately Daniel Frishberg, that this was the case. At this time I worked with the existing employees of BizRadio to create a restructuring plan and “Path to Profitability” (that was provided to Daniel Frishberg and Al Kaleta) to eliminate the operating losses, but more importantly, to eliminate any conflict of interest between the RIA and BizRadio. Although there was an outward appearance that it was being well received and implemented, in the end, I feel that it was summarily dismissed.

Now…the real kicker for me is why, in the Wallace Bajjali fund, you would allow Al Kaleta to take an active role in the investment of funds or allocation of assets?  As an example, I received the following which is being shared in an edited form for illustration purposes:

The first part of July, 2008, I received a telephone call from Al Kaleta.  Al informed me that he was sending a paper that needed my immediate signature.  He said it was important that I sign and send back as soon as possible.  Al Kaleta did not give me an explanation of what the paper contained and I did not ask.  I trusted Al to carry out my original intent of investing in low risk bonds.  At the time I signed the document, I was not aware that Wallace Bajjali Development Partners LC, were part owners of Biz Radio, and Al did not inform me.

NOTE: Perhaps it is not necessary to tell investors in a private placement where there money is going, but most folks could reasonably assume that Wallace Bajjali investments are not made in unrelated business ventures – like BizRadio.  The apparent practical motivation to invest in BizRadio is that is the hand that feeds you – or the money source for future investments.

The Express Mail package was delivered by DHL Express Courier on July 12, 2008. I kept the original envelope.  I kept the document until the next day and did not see anything out of order so signed it.    I don’t remember anything on the page except names and a designated place for me to sign.  I assumed that since two years had passed, my investment with Wallace Bajjali Development Partners LP was being terminated and the money was being invested back into my Fidelity account, as was the original agreement by telephone with Al Kaleta. Either the afternoon that I signed or the next day Al Kaleta again called to see if I had returned the signature page.  A copy of the Fidelity Cashiering Journal Request document with my signature that I later received does not look familiar to me.

NOTE: It is now mid-2008 when David Wallace said he was becoming concerned about BizRadio.  If David is accurate about the date, then why would he allow Al Kaleta get anywhere close to the funds invested with Wallace Bajjali?  Secondly, this investor states, “A copy of the Fidelity Cashiering Journal Request document with my signature that I later received does not look familiar to me.”  Is there an inference there that forgery could be involved on investment papers here related to Al Kaleta?

I received a Memorandum of Payment schedule in Oct. 2008, dated 10/7/2008, re 11%/(investment amount removed for privacy) and a copy of the Secured Promissory Note. I filed the document without looking at it. I did not know it was high risk investment because Al Kaleta had assured me when I set up my account in his office that only secure bond investments would be made. The first payment of interest, $XXXX was transferred to my Fidelity account #xxx-xxxxx in September, 2008.  Payment for the forth quarter 2008 was made in January, 2009 in the amount of $XXXX. Payments for the first and second quarter, 2009 were made. Payments of $XXXX for each of the third and fourth quarters are past due.

NOTE:  Now I really have some questions.  Is it possible that the investment interest amounts were made from other “fresh” investors funds and that they stopped because the Ponzi scheme crashed?  As I’ve said before, something smells Frishy.

On Nov. 20, 2009, I received an e-mail from Frishberg, Jordan & Stewart ADV, titled “The Biz Radio Network Chronicle Article Nov. 20, 2009”, with several highlights.  Referencing page 2 of 2, of “Where it Went”, I did not receive any inquiries asking if I knew I was lending to Biz Radio.  I would have answered that I did not know I was making a loan to Biz Radio.  My account is a personal retirement account, I am not a business.  I was not made aware of how risky this investment was until December of 2009.

Sad!

So here are my last questions for David Wallace which were part of our phone interview today:

When Al Kaleta and Dan Frishberg brought investors to you for your various funds, did they ask for you (or the funds) to invest a portion back into BizRadio?

DW Responds:  No.  We would have investors come in and obviously they would be qualified and they would invest in … like the West Houston fund – the capital would come in, we made real estate investments – we didn’t have any ownership in BizRadio in that fund.  In the second fund, Wallace Bajjali out of ten different transactions – nine of which were real estate and one of which was an equity investment in BizRadio.  At the time we were looking at making a private equity investment – sure we did due diligence just like all the other equity investors that made a direct investment in BizRadio – it was never a situation where there was pressure or anything.  Based on the materials we were presented, at the time, it looked like a prudent investment and a good business strategy.  It didn’t turn out that way!

I haven’t seen those materials you’re referring to.  In your opinion were those materials – the prospectus if you will – the primary product of Dan Frishberg or Al Kaleta or were the two of them in tandem?

DW Responds:  I think the two of them in tandem.  They also hired a guy – John Lundsford (spelling might be incorrect).  John came in as the Chief Financial Officer of the business.  He’s been involved in the roll up of different cable companies, and in financing radio station holding companies.  I figured that you’ve got somebody here that has raised billions of dollars for this type of an enterprise – surely as we move forward – as you look at this business plan and this private placement material – again it smelled of credibility.

David, I’m not trying to be argumentative in this question, but what expertise in evaluating the merits of radio property do you have and I think you just answered the question in your comments above?

DW Responds:  That’s why when I answered one of the questions about the management team or Daniel’s ability to execute – I basically said you surround yourself with people, like a John Lundsford.  John is a very talented person.  I think in the final analysis – I think whether John was not able to execute or was instructed to do other things – I don’t know.  Needless to say, with his pedigree the company still had problems.

Were you ever told that BizRadio was a shell company – an expense company if you will – that, at least in Dana Frishberg’s mind, it never was designed to produce a substantial enough profit to provide a fair and equitable return for investors?

DW Responds:  The concept and what we invested in was not what you just described.  The concept we invested in was how can we grow the enterprise – how can we get profitable – how can we generate a good return for our investment.   But hindsight being 20/20, I, too, have had many of those interviews with former employees and some investors – and apparently some of those investors were even told – “yea, this is nothing more than a loss leader for our RIA!”  I get incensed when I hear that!

If Dan Frishberg has said that it’s a “loss leader for his RIA” – well I’m having a hard time here.  Let me put it this way…  what I hear is that Dan Frishberg is taking investor money, placing it into BizRadio so it can pay it’s bills, so I (Dan Frishberg) can grow my RIA – which I (Dan Frishberg) personally gain benefit from but which BizRadio has not interest in.  Am I missing something?

DW Responds:  I think that what you just described is an inherently a conflict of interest.  That’s part of the reason I think the SEC continues to ask a lot of questions.

According to an investor source, the Laffer, Frishberg, Wallace Economic Opportunity Fund cannot invest more than 20% of the capital of the fund into any one investment.  How did 50+% get invested into BizRadio in contravention of the agreement?

DW Response:  Good question.  Let’s talk about the funds themselves and the way that activities take place.  When dollars come into the fund from an investor there’s a preferred return that starts ticking immediately.  So, it’s incumbent on us as the General Partner to make sure those funds are deployed immediately.  If we raise a million dollars of what’s supposed to be a $100 million dollar fund – as that million dollars comes in it gets deployed and we make an investment in real estate of whatever the case may be.  So a million dollars over supposed what would be $100 million dollars is the analysis that was taking place.

The very first investment that you make in this fund… if there’s a million dollars then its a million over a million – so you’re already 100% invested in one particular asset.  If you continue to receive assurances that the capital will continue to come in – that denominator will continue to grow – then based on sheer math it would have never been more than 20%.

In this situation, when the Frishberg and Kaleta folks stopped raising capital – for whatever reason – obviously that denominator stayed at a particular level and sure there’s more than 20% invested in BizRadio in that particular fund.

GALLAGHER COMMENT:  Of all the questions that David Wallace so kindly answered, this one struck me as a weak link.  I do completely understand the inflow of capital and outflow into investments.  No problem there.  But, put into perspective, the General Partner has a fiduciary duty to protect the investors.  So let’s say, if I were to raise $25 million to invest in real estate and it would cost $4 million to get into any one investment, would it not stand to reason that you would hold investment funds coming in – in some safe investment – until you have raised at least enough to do your first deal?  Here’s a missing link for me…why would you put the first monies (inferred from David Wallace’s comments above) into BizRadio while you were still seeking investor dollars?

It just doesn’t make sense.  Al and Daniel (as David refers to them) must have been the principle investment resource for David in the LFW Fund as David said that when they quit seeking investor dollars…the denominator changed and the terms of the agreement were violated.  Now, I’m not an attorney, but as an investor I would look to the General Partners – jointly and severally – to make me whole – if I believed that they were not prudent with investment funds.  This area still causes some concern and seems to be an area of vulnerability for David Wallace.

I haven’t asked this question before, but what was Laffer’s role in this other than lending his name to it and potentially helping raise investment funds?

DW Response: I’ve known Arthur since the late ’80’s.  And when Daniel knew that I knew Arthur he wanted to meet him and so I made the introduction.  From that it was – how can Arthur go on the radio with Daniel – how can Arthur be an advisor or consultant?  In connection with the Laffer, Frishberg, Wallace fund – Arthur actually owns a percentage of the general partner.  He was really more supposed to be an adviser and do some other services, I guess for Frishberg – I’m not sure for Frishberg and Kaleta I guess – or the radio – I don’t know all the particulars.

I am assuming that Daniel has paid him (referring to Arthur Laffer) through Frishberg and Kaleta or through his radio time on BizRadio.  I really don’t know.

What impact does the involuntary bankruptcy have you and your company?  Have you joined into this process to protect your interests?  Seems you’d want to protect your investors by being active in the bankruptcy – am I missing something?

DW Response:  Well…you don’t need to join in the process to protect your interests.   Number one we have an equity interest and we are an agent that represent some who are secured note holders.  So as a secured creditor obviously we are watching what is going on with “the involuntary.”

I called a meeting about two weeks ago of those secured note holders.  Let’s face it – some of those secured note holders are basically on the side of “let’s give BizRadio time” and some of those secured note holders are just diametrically opposed to that.   You have investors on both side of that equation.

I called a meeting of all of those secured note holders and basically said, “Guys, I need some direction.  I need a consensus as to which direction we go.  Here are the options.”  I basically said, “We can do nothing and wait.  We can foreclose on the assets.  Or we can start an involuntary petition.”  That was my recommendation.

My recommendation wearing the agent hat on behalf of these note holders was that we pursue an involuntary bankruptcy on BizRadio.  Stop the sale to Salem.  And position ourselves to get our hands on the FCC license, the collateral and maximize the return for us as secured note holders.

After I spoke for perhaps 45 minutes… one of the other secured note holders stood up and said in so many words, “Too late, I did it today.”  So that’s where they are and we’re obviously communicating with the SEC and others in connection with this.  We’re continuing to monitor this.  There are a lot of things being done by this petitioning group that filed the involuntary.

I’m going to show my ignorance here.  Apparently three creditors are required to petition and three did.  But if your recommendation to the investor group was to file an involuntary bankruptcy, then would it not make sense that you would not – add your names to – join in on – whatever, but be included in the involuntary that has been filed?

DW Response:  It doesn’t change your collateral position.  If for example, Joe Schmoe files an involuntary bankruptcy and I’m a secured creditor – it doesn’t change my secured position at all.  There is a process.  The process right now is to determine if BizRadio is insolvent?  Can they pay their debts as they fall due?

GALLAGHER COMMENTS: I still have some confusion here.  If David openly acknowledges that, as he put it, wearing the Agent hat – he had a responsibility to protect the investors, and he was recommending filing an involuntary bankruptcy, it would seem that he would join those who have already filed vs. sitting and waiting on the sidelines.

I talked late today to a bankruptcy attorney (not in Texas) just to ask for guidance and he agreed with my comment above.  While it may not improve the security interest, it certainly does strengthen the involuntary claim when more people join.  In fact, he stated that were it his client, he would join – if for no other reason than to show that he was acting fully in his Agent fiduciary capacity to protect the secured creditors.

Go figure!

As the conversation was winding down I had just one last question.

Dan Frishberg had an RIA.  It would appear pretty obvious at this time that, he used BizRadio to attract more investors – to manage their investment through his RIA – and none of that (investment returns from Dan or Al’s RIA) ever – none of that revenue – ever went back to BizRadio.  BizRadio never had an ownership interest in that.  Then somewhere along the line, Dan Frishberg transferred his assets under management or RIA to some other guy (I don’t recall his name).  So, as secured creditors in BizRadio, since BizRadio and Dan Frishberg were in essence one in the same – is there a way to pierce the veil to get access to the income that’s being generated from those assets under management so investors can be paid a reasonable return? (phew…this was a long question)

DW Response:  Suffice it to say, we’re working with the SEC in connection with things like that.

CONCLUSION:  Going in I had the suspicion that David Wallace was suckered.  After his written response and our conversation today, I still believe that – to a point.  I believe that David – a young man – was at the outset snookered – lured in by older and wiser Al Kaleta and Daniel Frishberg – both of whom (I have come to believe) knew exactly what they were doing.  David became an investment conduit and I’m not sure he saw that at the outset.

Once in, however, I believe that David came to rely on Al and Daniel to be the primary source of his investment capital and once on the money tit it’s hard to get off.  It’s addictive.  Then…it went too far and I feel (of course David could tell me that I’m wrong) that David did what he could to salvage a bad situation and perhaps in that process lost his objectivity.  If David has a vulnerability it would be a shareholder suit alleging lack of fiduciary duty in his role as General Partner and Agent.  Is David guilty of criminal activity – I don’t think so and I don’t think that any law enforcement would pursue that against David.

What I do think is that David will learn from this experience and that due diligence and attention to fiduciary duties will rank substantially higher on his list in his very bright future.

Personally I thank David for his willingness to talk and share as openly as he did.

YOUR COMMENTS WELCOME – from this the longest blog I think I’ve ever written.

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5 Responses to BizRadio: An Interview with David Wallace about the Dan Frishberg – Al Kaleta fiasco!

  1. Kathy Hines says:

    I can’t tell you how much I’ve enjoyed following this story. Thank you for all your investigative reporting. As someone who worked for the radio station 1360AM-KMNY in Dallas who lost their broadcast signal to bizradio this past Dec. 2009, it’s been most interesting.

  2. Florence Reiley says:

    The money taken from my investment account represents a life time of hard work and frugality. I am 88 years old, and thought I was secure for the days of my retirement.

  3. Sean Reed says:

    I spoke with David a while back and asked how much of the $100K I invested was left (I am a small fish invester…$100K is a lot to me) and he said $120K.

    I hope that he was telling the truth. The liars working at Frishberg Kaleta were giving wild reports of profitability (70% the first year…I knew that was bul&*^y).

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