November 15 2007 – a letter sent to investors from David Wallace stated the following:
The third quarter of 2007 was very active for both the ongoing due diligence and development activities for Fund II’s current portfolio, as well as the future investment activities of Fund II. During this quarter, Fund II completed one real estate development investment. The following table reflects the equity invested in such companies:
The table reflected that of funds invested through June 30, 2007 — $3,657,170 was invested in BizRadio out of a total of $6,994,170 or over 52% was invested in one investment (and that wasn’t real estate). And for Quarter 3 2007 an additional $1,190,047 was committed to BizRadio – again over 50% of the committed funds for Q3 2007.
The investor report goes on to say:
BizRadio Network – BizRadio provides both the creation and distribution of high-end, talk radio “business” content to an affluent audience. The ability to reach the well-educated, affluent market is a unique niche that can be served by very few stations. BizRadio is successful in this effort. The distribution of the current content is a simulcast on 1320AM in Houston and 1360AM in Dallas-Fort Worth. The current strategy is to secure capital to acquire (rather than lease) the various stations, which will result in a savings of approximately $200,000 per month by eliminating the respective lease payments. The future business strategy is to expand the content product offering (to add a newsletter, stock-tip market letter, day-trading academy, pod casts, etc.) and to broaden the distribution network and acquire additional stations in specific key markets. Two radio stations (one in Houston and one in Fort Worth) were secured through letters of intent during the second quarter of 2007. However, the due diligence findings of the Dallas station caused BizRadio to terminate its discussions, and the Houston station is nearing the final negotiation of a definitive agreement. It is anticipated that the acquisition of these stations will be funded by 50% equity, and the remaining capital will come from third-party purchase money debt.
Now for some time you know, especially for those of you who read this blog series, that I’ve been asking questions related to David Wallace’s involvement with BizRadio. I am, and have been, confused – cause on one hand it seems that David has been a continued source of funds for BizRadio – and for many those investments have turned into substantial losses – perhaps unrecoverable losses. On the other hand, David has said that he (as an investment general partner) did his due diligence and, seeing the ship sinking, tried to take the helm and revive BizRadio in a desperate situation.
SO LET ME JUST PUT THE CARDS ON THE TABLE!
I have been told on more than one occasion that David Wallace had lost his objectivity when it came to Al Kaleta, Daniel Frishberg and BizRadio. David, so I’ve been told, got hooked into the Daniel Frishberg vision of BizRadio (I guess we can say he drank the Koolaid) and saw this as a way to attract continued investors into his funds. Specifically, I was told that Daniel Frishberg effectively told David Wallace that he would funnel investors to him to help him with his “funds” (find investors so to speak) as long as he would agree to funnel money back to BizRadio.
David, on the other hand, has said that he saw the value in BizRadio and felt that the investment was worthwhile. That’s fair. But, here’s the rub. If you are putting a fund together, would anyone who has a fiduciary responsibility to his/her investors ever invest 50+% into one company and, if so, into a company that had then no substantive tangible assets?
I asked David the following in an earlier blog (to see the full blog click: http://chuckgallagher.wordpress.com/2010/04/14/bizradio-an-interview-with-david-wallace-about-the-dan-frishberg-al-kaleta-fiasco/
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.
Now here’s where the numbers just don’t add up. David says, “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 according to David the attraction was that they would bring David clients. Seems that we have a validation of what has been said to me on several occasions – David was lured with the promise of money for his funds. Keep in mind those words that I have shown in “blue” here are David’s words not mine!
Yet as Daniel Frishberg and Al Kaleta funneled money into David’s funds – David (claiming due diligence) was pouring money right back into BizRadio. And for what? Was that money earmarked for the “acquisition” of the station (at least the license would be a tangible asset – of sorts) or were the funds being used to subsidize current operating expenses?
I’m sorry, but I don’t see true evidence of “due diligence!” What I see is a young energetic individual (David Wallace) being caught up in the attraction of the massive illusion that Daniel Frishberg and Al Kaleta created. David (as I see it) seemed to be interested in gaining a new source of investor funds and was willing to “sell his objectivity” (through funneling money back to BizRadio) for that gain. Some may say that my opinion is skewed and inaccurate, but I think when this is all said and done – and the final chapter is finished – we will see that I’m closer to right than wrong. How else can one explain such substantial investments into BizRadio in contravention of any reasonable investment advice related to diversification. Time after time David Wallace has seemed to ignore the simple rule of diversification in favor of funding the “project” of Al Kaleta and Daniel Frishberg called – BizRadio.
NOTICE I started this off with information from 2007. But David (again from the earlier interview) stated the following:
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.
If I were an investor I would be furious. First, there’s the issue of diversification – grade (F). When over 50% of the fund is invested in one asset we’ve got a problem. Mind you, this was true at least for Q3 of Fund II in 2007 and also was true in another fund where BizRadio represented over 60% of the funds investment.
But…if, as David says, “I began to voice my own criticisms in mid- to late 2008“, then why would he not call a halt to future investments into BizRadio until his voice was heard? David was the primary source of BizRadio’s operating capital and therefore, effectively, was in control. The reality is – without David Wallace’s continued investments into BizRadio – BizRadio would have collapsed much sooner than later and millions of current losses would have been avoided. In my opinion, David’s insistent involvement with BizRadio, even after he “voiced criticisms” reflected a lack of independence as a general partner in his funds and therefore will (likely) put him at personal risk for civil lawsuits.
The larger question, in my mind, is whether David Wallace will face criminal conspiracy charges – assuming criminal charges are brought against Al Kaleta, Daniel Frishberg, and Elisea Frishberg. Did David conspire willingly to defraud investors by continuing the charade that BizRadio had a viable business plan that had a chance of success and thereby provide reasonable assurance that an investor could gain a reasonable return on their investment?
Here’s an example… I got a call from a “former” CPA. Seems (in short) he was a CFO of a company. He felt that the company was doing something unethical and quit. (By the way that was 5 years ago). Turns out 5 years later that the US Attorney took down the company for illegal activities. But the US Attorney also went after the former CFO. Why? Conspiracy. By not reporting the fraud, he conspired to commit fraud. Result? Plea conviction with probation and the loss of his license. Moral of the story… If that guy can be convicted – wonder what would happen to David considering that the flow of defrauded investor funds seemed to continue to flow from his funds well into 2009 when it was clear that the ship was sinking?
What ultimately happens with David Wallace? I honestly don’t know. I suspect that his willingness to cooperate might be just the ticket to save his skin. As David said, “…the connection by our investment into BizRadio, does not represent our finest investment hour.” Sometimes you have to call them as you see them. I think that David’s statement is a major understatement. All evidence suggests that David was played like a fiddle by Kaleta and Frishberg – being seduced into being a “money laundering” mechanism for Frishberg and Kaleta to convert their investor sources into BizRadio funds – all the while trying to seem as if there was independence of investment activity in play.
Independence – not a chance.
Due Diligence - no way.
Greed and hubris – likely!
AGAIN – YOUR COMMENTS ARE WELCOME!