First, I find no joy in reporting that once what appeared to be a viable business enterprise is dead. There are investors who have lost thousands, if not hundreds of thousands of dollars, and had no clue that their investment was at risk. There are investment advisers who, despite their best efforts, have been sucked into the murky swamp of a scam that will be known as BizRadio or Frishberg’s folly. It is all very unfortunate.
Today, in fact, likely by the time this is posted there will be a hearing seeking, to put it simply (cause that’s the way I think), to consolidate the SEC receiver’s power to protect investors beyond Al Kaleta and Kaleta Capital Management (KCM) to include Daniel Frishberg, Daniel Frishberg Financial Services (DFFS – his RIA), BizRadio, BizMedia and other “shadow” companies named – Frishberg Global Investments, LLC and Portnoy, LLC.
In the filing the SEC receiver states (in part) the following in the motion to the court:
- Daniel Frishberg and Defendant Al Kaleta created a network of companies (KCM, DFFS, BizRadio, BizMedia, FGI and Portnoy) (the “FK affiliates”) – all owned and controlled by Frishberg and Kaleta
- DFFS and F&K were investment advisory firms through which Frishberg and Kaleta developed a substantial client base.
- A number of investment advisory clients of these entities became victims of the KCM promissory note fraud which is at the center of the present action.
- All of the entities and individuals sought to be included in the KCM Receivership by this Motion are inextricably intertwined with both KCM, the Dependant presently in receivership, and Defendant Kaleta, against whom disgorgement – in an amount to be determined – has already been ordered by this Court’s Judgement dated December 2, 2009.
- The Commission charged that, in fact, KCM and Kaleta had induced investors to purchase KCM promissory notes using the proceeds to finance businesses owned and controlled by Kaleta, Frishberg and others – businesses that were anything but creditworthy.
- More than half of the KCM investors’ funds, were loaned to Relief Defendant BizRadio. Perpetrating a blatant, intentional fraud, Kaleta and Frishberg failed to disclose to KCM investors that all of BizRadio’s tangible assets had purportedly been “pledged” to third parties which would potentially leave the KCM investors little more than BizRadio’s dubious prospects for future income and – as it turns out – fraud and other claims against the entities and their principals.
- The Receiver requests that this Court exercise its equity jurisdiction to place BizRadio, its affiliates and its two principles (Kaleta and Frishberg) within the pending receivership so that the claims of KCM investors can be pursued in an orderly manner.
- At all relevant times, DFFS was owned and controlled by defendant Kaleta and Frishberg. Kaleta and Frishberg caused KCM to loan DFFS amounts aggregating approximately $1,280,000 from the KCM note offering. These “loans” were not legitimate arms-length transactions. The KCM loans to DFFS were, in substance, a misappropriation of KCM investor funds.
- The Receiver is informed that Barrington Financial, a registered investment advisor, has entered into an agreement with DFFS, acting through Frishberg pursuant to which it acquired the asset base of DFFS yielding to DFFS (or Frishberg himself) a substantial share of future revenues generated by the asset base. The Receiver served Barrington’s Chief Executive Officer and Director of Compliance with the Order Appointing Receiver on February 17, 2010.
- It is the Receiver’s understanding that DFFS, still owned and controlled by Frishberg, is a going concern with cash flow from which to respond in the present action and assets that might satisfy an order for disgorgement of the proceeds of the KCM note offering.
- The Receiver seeks a modification of the Order Appointing a Receiver to include Frishberg, Kaleta, KCM, DFFS, F&K, BizRadio, Biz Media, FGI and Portnoy within the Receivership on the grounds that they are related to, affiliated with, and under common control with Defendant KCM.
- The Receiver seeks a modification of the Order on the further ground that Frishberg and Kaleta are the alter egos of KCM, DFFS, F&K, BizRadio, Biz Media, FGI and Portnoy.
- In support of the Receiver’s request to pierce the corporate veil and reach Frishberg and Kaleta in their individual capacities, the Receiver will demonstrate that each individual participate in a course of conduct constituting an abuse of corporate privilege and that recognizing the existence of a separate corporate existence would bring about an inequitable result to defrauded investors.
- The Receiver also requests on an emergency basis a freeze of assets pending this Court’s determination of The Motion to Modify the Receivership Order. An asset freeze is necessary to prevent further dissipation of the KCM investor’s funds and to preserve assets that could be used to pay disgorgement and civil penalties.
COMMENTS – When an SEC appointed Receiver takes the action that will be heard in court today (May 6, 2010) using words like “blatant, intentional fraud” you know that more is coming and likely that more is criminal.
To be clear, the Receiver’s role is to identify and attach assets that could be used to make whole defrauded investors and to pay civil penalties. Since I’m not an attorney, I candidly state that I don’t know who gets what when – in other words – I don’t know the pecking order for claims that have been or will be made. What is clear is that the Receiver is taking the position that a unified collection effort under the supervision of the Receiver (Court) is better than a disjointed effort among different investors, shareholders, or (Southern way of looking at it) folks – who think that Daniel and Albert own them for their losses.
The Receiver goes on to make the following statements (presented in part):
- Frishberg and Kaleta own and control a group of corporate affiliates that operated from a shared location, utilizing the services of the same employees and freely manipulating the accounting to reflect whatever result they required.
- A daisy chain of loans by and among, KCM, Frishberg, Kaleta, BizRadio, DFFS, F&K, and other related parties made the accounting function little more than a creative exercise.
- The books and records make clear that Frishberg and Kaleta have regularly used KCM assets for their personal benefit.
- Every dollar transferred from KCM to the FK Affiliates came from defrauded investors.
- KCM is left with no liquid assets and almost $10 million in liabilities to defrauded investors.
- In records reviewed by the Receiver, Frishberg referred to KCM as a “Credit Line” to BizRadio.
Many of the Receivers comments were referenced by various email correspondence – likely some of which have been seen in my blog over the past several months.
The Receiver goes on (comments presented in brief):
- The books and records of KCM reflect serial loans to BizRadio in varying amounts beginning in April 2007. It appears that BizRadio utilized KCM as a credit line or an automatic teller, with up to nine promissory notes in one month, and notes ranging in size from a few hundred dollars to $800,000 at a time.
- The evidence of improper transfers – not at arm’s length – from KCM to BizRadio is indisputable.
- The books and records reflect KCM loans to BizRadio as of the third quarter 2009 in amounts exceeding $5,000,000.
- Mr. Frishberg has asserted – falsely – that the F&K and DFFS notes do not come due until 2013.
- Abandoning all pretense of legitimacy, Frishberg accessed the proceeds of the KCM note offering for the purchase of his personal residence. The note was repaid with interest to the Receiver in the amount of $122,068.56 on January 14, 2010. This payment is the only amount which has been repaid by Frishberg or Frishberg controlled entities and was made, no doubt, in recognition that the transaction would not have been considered lawful by anyone’s reckoning.
- An analysis prepared by the SEC staff related to Kaleta’s personal expenditures on KCM credit cards suggests that Kaleta owed KCM upwards of $1.5 million.
- Disturbingly, Kaleta’s counsel – former KCM counsel – recently indicated to the Receiver that Kaleta does not have funds sufficient to pay any form of disgorgement, let along funds sufficient to cover the shortfall in recovery sustained by KCM investors.
- Statement published by Frishberg clearly state that Kaleta recently sold his interest in DFFS to Frishberg. Nothwithstanding the substantial indebtedness of DFFS to KCM, Kaleta personally has accepted repayment from DFFS for a series of “personal loans” he purportedly made to his affiliate. Kaleta arranged that the purported “repayment” be directed to the Fidelity account of his son, instead of into his own.
- On March 13, 2010, without notice to the Receiver or to this Court, a Chapter 7 Involuntary Bankruptcy petition was filed on behalf of three BizRadio investors. Since BizRadio is an existing Relief Defendant in the current action and at least one of the BizRadio investors petitioning for its involuntary bankruptcy is also a KCM investor, the Receiver urges this Court to retain jurisdiction over BizRadio and that it be brought within the Receivership estate.
COMMENT: It is clear that the Receiver (an rightly so) is seeking to capture all assets so that an equitable distribution and/or liquidation can take place. Makes sense to me, although I doubt all parties concerned want to be placed in the same bucket together. From my conversations over the past several months, many of them labor under the illusion that what they received from Al Kaleta was legitimate and that they have a superior right. Personally, I doubt that is true.
The Receiver’s comments continue:
- Frishberg testified before the SEC that Barrington Financial, a registered investment advisor, has entered into an agreement with DFFS, acting through Frishberg, pursuant to which it acquired the asset base of DFFS for a substantial share of future revenues generated by the asset base. This transfer of the existing asset base would leave DFFS with the KCM debt, but without a revenue stream from which to repay it. Frishberg, on the other hand anticipates being paid by Barrington a percentage of the assets transferred to it.
- DFFS and Frishberg should be placed within the KCM Receivership so that any cash flow from Barrington to DFFS (or Frishberg personally) is preserved for the benefit of the KCM investors.
COMMENT: Somehow with all this turmoil…I have the suspicion that any reasonable man would take his/her assets out from under the management of Barrington (or anyone remotely connected with Frishberg) and place them elsewhere. However, that action would mean that the income from DFFS or Barrington would diminish and there would be less for defrauded investors to claim.
Receiver comments continue:
- The FK Affiliates are the alter egos of their principal, Frishberg and Kaleta and are the alter egos of each other. The Receiver seeks to disregard the corporate entities and reach all FK Affiliates and both Frishberg and Kaleta individually.
The full filing by the Receiver is attached here: Notice Of Related Filing 5-5-10
CONCLUSION: Likely as I write this entry…the Receiver is in court in Houston being heard by a Judge. The Receiver has intimate knowledge of what has taken place and the SEC certainly has the authority to conduct a thorough investigation. That is being done…too…as we speak. What will be the outcome? With remorse I wish I could say better, but it don’t look good (as us Southern boys would say).
I have said early on that I thought that Dan Frishberg would face time in prison. Many who have read my writings have suggested that I’ve been too harsh, that I haven’t respected “innocent till proven guilty.” Well…(with slight modification) like Forest Gump said, “I many not be a smart man, but I know what fraud is!”
The outcome will be that:
- Most, if not all the investors, who have been defrauded will lose most, if not all of their money. Sure there will be some return, but it won’t be nearly enough to satisfy what they thought they would receive when promised the moon by, what I will now call, scam artists.
- Rehan Siddiqi will likely fail in his lawsuit as there are just too many people in line with, likely, superior claims. He was screwed just like many many more who read this blog.
- The sale to Salem…well that one has me baffled. Since it was part cash and part air time, I suspect that Frishberg will soon be off the air and Salem will have to put up more cash to acquire the station or it will be put out to the highest bidder (for cash). Perhaps that’s the best asset that BizRadio has to be liquidated.
- There is no doubt that branches of the federal government that have a criminal prosecution arm are preparing their case to prosecute Frishberg and Kaleta criminally. The question is who is indicted? Frishberg, Kaleta, spouses, other employees (for conspiracy)?
- The involvement of David Wallace with Frishberg and Kaleta may not have put him out of business, but it may have harmed his credibility and, while I personally like David, I wonder if his failure to take action to protect his investors places him in the line of fire for a conspiracy charge. I hope not.
- Finally, Frishberg and Kaleta will spend time in federal prison (and based on the sentences being handed out today) I suspect that if my prediction is right, it will be for a substantial period of time.
Every choice has a consequence and today…well, let’s see what the court says are the consequences.
YOUR COMMENTS ARE WELCOME!