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U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK


SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,   

v.

BURTON G. FRIEDLANDER,
FRIEDLANDER INTERNATIONAL LIMITED,
FRIEDLANDER MANAGEMENT LIMITED,
FRIEDLANDER CAPITAL MANAGEMENT
COPRPORATION,
OPAL INTERNATIONAL FUND, and
FRIEDLANDER LIMITED PARTNERSHIP,

Defendants.   


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FIRST AMENDED
COMPLAINT

Case No. 01-CV-4596
(KMW)

The Securities and Exchange Commission ("SEC") alleges that:

NATURE OF THE ACTION

1. In May 2001, the SEC brought this action to stop a massive fraud perpetrated by Defendants Friedlander, Friedlander Management Limited ("FML"), Friedlander Capital Management Corporation ("FCMC"), Opal International Fund ("Opal") and Friedlander Limited Partnership ("FLP") in connection with an investment entity known as Friedlander International Limited ("the Hedge Fund"). Since August 2000, or earlier, Defendants Friedlander, FML, and FCMC had misrepresented and inflated the net asset value ("NAV") of the Hedge Fund to its shareholders by overstating the value of certain assets of the Hedge Fund, had induced investments in the Hedge Fund based upon misrepresented and inflated statements of performance results, and had redeemed their own interests in the Hedge Fund at misrepresented and inflated values, to the detriment of the Hedge Fund's other investors. In perpetrating their fraudulent scheme, Friedlander and FCMC had used the assets of Opal and FLP, other investment funds managed by Friedlander and FCMC, to make month-end purchases of a security, in order manipulate the price upward and thereby artificially inflate the value of securities held by the Hedge Fund.

2. The SEC hereby amends its Complaint to include an additional and separate fraudulent scheme involving the management of a pooled investment fund ("pooled fund") by Friedlander and FCMC, including the generation and distribution of false and misleading reports regarding the investors' returns in this pooled fund, the fraudulent use of an accounting firm's letterhead and signature, and the conversion by Friedlander and FCMC of investor funds for Friedlander's personal use.

3. By engaging in the conduct set forth in paragraphs 1 and 2, Friedlander, the Hedge Fund, FML, FCMC, Opal and FLP have violated, and unless enjoined will continue to violate, Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. §240.10b-5. In addition, Friedlander, FML and FCMC have violated, and unless enjoined will continue to violate, Section 206(1) and (2) of the Investment Advisors Act of 1940 ("Adviser's Act"), 15 U.S.C. § 80b-6.

4. The SEC seeks permanent injunctions against the Defendants from engaging in the wrongful conduct alleged in this Complaint. The SEC also seeks a final judgment ordering the Defendants to account for and to disgorge any ill-gotten gains and to pay prejudgment interest thereon, and ordering the Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).

JURISDICTION AND VENUE

5. This court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 77u(e) and 78aa, and Section 214 of the Advisors Act, 15 U.S.C. § 80b-14.

6. Venue in this Court is proper because certain of the transactions, acts, practices and courses of business alleged occurred within the Southern District of New York, including the purchase of investments on behalf of the Hedge Fund by Friedlander, FML, FCMC, Opal and FLP through accounts at Bear Stearns Securities Corp. ("Bear Stearns") as well as other brokerage and bank accounts located in this District. Substantially all of the assets of the Hedge Fund are located in an account at Bear Stearns, which is located in this District. In addition, the primary bank account for FCMC, into which pooled fund deposits were made, was located in this District at Citibank, NA.

DEFENDANTS

7. BURTON G. FRIEDLANDER, age 64, is an unregistered investment advisor who lives and works in Greenwich, Connecticut. Friedlander is a director of Friedlander International Limited (the Hedge Fund), and is a director of and controls both Friedlander Management Limited (FML) and Friedlander Capital Management Corporation (FCMC), which act as the investment advisor for the Hedge Fund.

8. FRIEDLANDER INTERNATIONAL LIMITED (the Hedge Fund) is a hedge fund incorporated as an International Business Company in the Commonwealth of the Bahamas, with its registered office in Nassau, Bahamas. The Hedge Fund is managed by Friedlander Management Limited (FML).

9. FRIEDLANDER MANAGEMENT LIMITED (FML) is an International Business Company incorporated in the Bahamas. FML manages the Hedge Fund through subcontracts with other entities, including Friedlander Capital Management Corporation (FCMC). FML is also a shareholder in the Hedge Fund

10. FRIEDLANDER CAPITAL MANAGEMENT CORPORATION (FCMC) is a Connecticut corporation in the business of investment management and based in Greenwich, Connecticut. Friedlander controls FCMC and is solely responsible for the day-to-day operations and investment advice rendered by FCMC. FCMC was retained by FML to manage the assets of the Hedge Fund. In addition, FCMC was the entity through which Friedlander managed the pooled investment fund.

11. OPAL INTERNATIONAL FUND (Opal) is an investment vehicle incorporated in the Cayman Islands. The assets of Opal are managed by Friedlander and FCMC, who make all investment decisions for Opal.

12. FRIEDLANDER LIMITED PARTNERSHIP (FLP) is an investment vehicle formed as a Limited Partnership in the State of Connecticut. Friedlander and FCMC also manage and make investment decisions regarding the assets of FLP.

Other Involved Entities

13. Morning Star Management Limited ("MSML"), is an International Business Company formed under the laws of the Bahamas, and controlled by Dean W. Lodmell ("Lodmell"), a resident of Connecticut. FML used MSML to perform the Hedge Fund's administrative functions, including a month end calculation of the net asset value (NAV) using information supplied by Friedlander, FCMC, Bear Stearns, and public resources. On August 4, 2000, MSML resigned as administrator effective November 2, 2000. However, Lodmell continued to perform administrative services for the Hedge Fund, including calculation of the NAV through at least January 2001.

14. Lion Investor Services (Bahamas) ("Lion"), an entity organized under the laws of the Bahamas, began providing administrative services to the Hedge Fund in January 2001, replacing MSML.

15. eNote.com Inc. ("eNote") is a Delaware corporation with its principal place of business in Williston, Vermont. The stock of eNote is traded over-the-counter and quoted on the OTC Bulletin Board system. eNote purports to be in the business of developing a system to allow access to electronic mail through a television set. According to its most recent filing with the SEC, as of September 30, 2000, the liabilities of eNote exceeded its assets. eNote has not generated any substantial revenue from operations since its inception in April 1999, and has relied upon loans from Friedlander, FCMC and others to meet its operating expenses.

16. KPMG, LLP ("KPMG"), formerly known as KPMG Peat Marwick LLP, is an accounting firm that Friedlander retained in or around January 1995 to prepare compilation reports for pooled fund investors for the fiscal year 1994. The letterhead of the firm was used for subsequent compilation reports without its knowledge or consent.

17. Gruntal & Co., Inc. ("Gruntal") was a broker-dealer at which Friedlander maintained a securities account for the pooled fund.

THE FIRST FRAUDULENT SCHEME

18. Since October 2000, or earlier, the defendants distributed false and misleading account statements to investors in the Hedge Fund, and, by means of these misrepresentations, induced additional investors to invest in the Hedge Fund. While directing and assisting in the calculation of the Net Asset Value (NAV) of the Hedge Fund, Friedlander overstated the value of certain unmarketable warrants in eNote held by the Hedge Fund and failed to account for the dilution of the common stock that would occur should the warrants be exercised and additional stock issued by eNote. In the calculation of the NAVs for October, November and December 2000, Friedlander valued the warrants at a price higher than the market price of the underlying common stock and continued to ignore the dilutive effect that the exercise of the warrants would cause.

19. In addition, at the end of each month from August 2000 to December 2000, Friedlander manipulated the stock price of eNote upward to be included in the month-end NAV. FCMC and Friedlander used the assets of Opal and FLP to purchase eNote stock in the month-end manipulations. On the last day of trading in August, September, October, November, and December 2000, Friedlander caused those two funds to purchase large amounts of eNote stock, which resulted in a price increase for each of those months. The price of eNote stock doubled on the last trading days of October 2000 and December 2000. At no other time during those five months did Friedlander (through FLP and Opal) purchase stock except at month's end.

20. Friedlander continued to sell shares in the Hedge Fund to investors through December 2000, using the Fund's inflated NAV. Between September 2000 and February 2001, Friedlander caused FML to redeem approximately $2.4 million in the Hedge Fund shares at inflated asset values for his benefit and that of FML and FCMC.

The Operations of the Hedge Fund, MSML and FCMC.

21. Defendant Friedlander controlled FML and FCMC and was solely responsible for overseeing their day-to-day operations. Through these entities, he exercised de facto control over the investment program of the Hedge Fund and had the authority and discretion to effect securities transactions for the Hedge Fund. Friedlander effected transfers of monies belonging to the Fund, had sole discretion in managing the Fund's assets, had the ability to hire or remove the Fund's administrator, and had the sole ability to modify the terms of the Hedge Fund's "explanatory memorandum", which served as the Hedge Fund's offering memorandum. As compensation for managing and advising the Hedge Fund, FML received a monthly management fee based upon a percentage of the total NAV of the Hedge Fund as well as a quarterly performance fee based upon the net profits of the Hedge Fund. FML then distributed the fee proceeds to FCMC and Friedlander as compensation for their role in the management of the Hedge Fund.

22. The Hedge Fund was not "transparent" in that its investors were not provided with the identity of the securities held in the Hedge Fund. The sole disclosure made to Hedge Fund investors was a statement of the per-share NAV of the Hedge Fund as of the last trading day of each month. The Hedge Fund was not registered with the SEC and did not make public filings of its holdings or financial condition.

23. Since the Fund's inception in 1998 through January 2001, MSML and Lodmell calculated the NAV of the Hedge Fund on a monthly basis under Friedlander's direction. MSML then sent monthly account statements based on the NAV to the Hedge Fund's investors. In performing the NAV calculation, MSML and Lodmell first determined the value of the total assets of the Hedge Fund, then divided that value by the number of shares outstanding.

24. MSML and Lodmell used published closing prices for the last trading day of the month when assigning value to publicly traded Hedge Fund assets. However, from April 2000, or earlier, through January 2001, MSML or Lodmell requested the prices of unlisted securities from Friedlander and FCMC and relied on the value provided by Friedlander to calculate the Fund's NAV. MSML and Lodmell provided the NAV to Friedlander and FCMC for approval before MSML transmitted it to the Hedge Fund's investors in their monthly account statements.

The Fund's Holdings of eNote Securities

25. In April 1999, Friedlander caused the Hedge Fund to invest $5 million in eNote, which had recently become a public company through a reverse merger. In exchange, the Hedge Fund received 5 million shares of preferred convertible stock (the "Preferred Stock"), becoming the sole holder of preferred stock in eNote.com. The fund also received a warrant that entitled the Hedge Fund to obtain an additional 2 million shares of eNote common stock at an exercise price $1.00 per share (the "Original Warrant") through April 2004.

26. Between August 2000 and March 2001, FCMC has been the main source of funding for eNote, lending a total of approximately $1.5 million in exchange for convertible debt instruments given by eNote to FCMC. For no further consideration, eNote also gave additional warrants for the purchase of 11,666,667 shares of eNote common stock to FCMC between August 2000 and November 2000, which were purportedly "gifted" to the Hedge Fund by FCMC. These warrants varied as to exercise price and expiration date.

27. A warrant is a security that entitles the buyer to buy a quantity of common stock at a specified exercise price for a stated period of time. If a warrant has an exercise price of $2.50, a rational investor would exercise the warrant only if the price of the common stock was above $2.50. If that price were below $2.50, a rational investor would buy the stock on the open market rather than exercise the warrant and take a loss. The eNote warrants were not publicly traded on an exchange or over-the-counter, and prices for these securities were not quoted in any market. As a result, the "price" or "value" of the warrants were not publicly available from a ticker or computer service.

28. As of December 31, 2000, these eNote holdings (the warrants and the Preferred Stock) constituted approximately 40 percent of the NAV represented to investors.

29. From March 2000 to the present, the market price for eNote's common stock has declined from $6.00 to $0.08 per share. The Hedge Fund continues to hold the Preferred Stock, the Original Warrant, and the additional warrants obtained without consideration, as a significant portion of its holdings.

The Defendants Overstated the Value of the Fund's eNote Warrants

30. From April 2000, or earlier through October 2000, FCMC and Friedlander valued the warrants by utilizing the Bloomberg Standard Option Valuation Program, a computer service for the valuation of options. An FCMC employee entered five variables into this program and used the results to establish a value for the eNote warrants. The option program did not take into account either the exercise price of the warrants (it would cost the Hedge Fund $1.00 to purchase a share of eNote common stock were it to exercise the option) nor did it account for the dilutive effect on the eNote common stock if the warrants were exercised and additional shares issued.

31. FCMC's valuation of the warrants also conflicted with the value assigned to those warrants by eNote. In August and September 2000, FCMC obtained warrants for 2.8 million shares of common stock in partial consideration for loans of $350,000 to eNote. In December 2000, FCMC assigned a value of over $4,000,000 to these warrants, while eNote valued the warrants at $325,500 in a filing with the SEC, stating that that the value was "determined by their proportionate share of value based upon the ratio of the warrant value, as determined by using Black-Scholes, to the aggregate value of the note and the warrant multiplied by the total proceeds received".

32. When calculating the NAVs for the periods ending November 30, 2000, and December 31, 2000, FCMC and Friedlander departed from the use of the computer program to value the warrants. Instead, FCMC and Friedlander arbitrarily assigned a value to the eNote warrants which had no relationship to the market price of eNote common stock, and in fact valued the warrants at a higher price than the market price for the underlying common stock.

33. On or about February 15, 2001, FCMC sent a letter to the new administrator of the Hedge Fund, Lion Corporate Services, in which FCMC represented the values of the preferred/convertible stock and warrants remained the same as those values misrepresented by Friedlander in connection with the NAV valuation for the end of January 2000.

34. The overstatement of the value of eNote warrants by Friedlander and FCMC caused continuing and substantial overvaluations of the Hedge Fund's net asset value, which resulted in new investors paying more for shares in the fund than the shares were worth. The overvaluation also caused the Hedge Fund to pay redemptions to shareholders, including FML and Friedlander, for more than their shares were worth, to the detriment of remaining shareholders, whose interest in the Fund was diminished.

Friedlander and FCMC Manipulated the Price of eNote Common Stock

35. In addition to the overvaluation of the warrants, which resulted in an inflated NAV for the Hedge Fund, Friedlander and FCMC also knowingly or recklessly manipulated the price of eNote common stock to overstate the Hedge Fund NAV.

36. At the end of each month from August through December 2000, Friedlander and FCMC purchased substantial quantities of eNote common stock through various brokerage accounts held for the benefit of FLP and Opal, with the intent to raise the market price of eNote stock and thereby inflate the value of the eNote holdings in the Hedge Fund for the calculation of NAV. To effect these purchases, Friedlander placed a series of orders, at increasing prices, on the last trading day of each month.

37. On the last trading day of November and December 2000, Friedlander also "marked the close" of trading in eNote common stock. "Marking the close" is a manipulative device by which a trader conducts the last trade of the day at a higher price than the prior trade, with the intent of affecting the reported closing price of the stock for that day.

38. In December of 2000, Friedlander purchased 140,000 shares of eNote common stock from an individual who wished to sell them to incur a tax loss. Friedlander only paid $1.00 for all of these shares to prevent those shares from entering the open market and thereby interfering with his manipulative scheme. His manipulative conduct pushed up the closing price of eNote common stock to $.50 per share at the end of that same month.

39. The end-of-the-month transactions by Friedlander between August 2000 and December 2000 were made with the intent to create actual or apparent active trading in eNote stock, raise the price of eNote stock, and maintain the price at an artificial level for the purpose of calculation of the Hedge Fund's NAV. The ultimate goal was to induce the purchase of shares in the Hedge Fund, and to inflate the value of the redemption or sale of shares in the Hedge Fund for the benefit of Friedlander and FML.

40. Friedlander directly benefited from the manipulative conduct. FCMC used the closing stock price of eNote on the last trading day of each month to determine the value to be assigned to the Hedge Fund's holdings of eNote Preferred Stock. Through October 2000 Friedlander used this month-end price to value the warrants held by eNote as well. These values were used to calculate the Hedge Fund's NAV, which increased the value of shares held by FML in the Hedge Fund for the benefit of FCMC and Friedlander. The overstated value also attracted additional investors to the Hedge Fund resulting in increased compensation paid to the FML for the benefit of FCMC and Friedlander, since the compensation of FML by the Hedge Fund was based on the net asset value and the performance of the Hedge Fund.

41. Friedlander was successful in manipulating the price of eNote stock upward at the end of each month, as follows:

Date

Closing Price

Previous Day's Close

Percentage Increase

8/31/2000

$3.00000

$1.68750

78%

9/29/2000

$2.50000

$1.75000

43%

10/31/2000

$1.09375

$0.40625

169%

11/30/2000

$0.50000

$0.40625

23%

12/29/2000

$0.50000

$0.18750

167%

42. The table below sets forth the details of Friedlander's trading, which was not disclosed to the investors in the Hedge Fund:

Purchase Date

No. of shares

Purchasing Entity

August

   

08/31/2000

49,000

Opal

September

   

09/29/2000

31,000

Opal

October

   

10/31/2000

208,500

Opal

November

   

11/30/2000

10,000

FLP

December

   

12/29/2000

45,000

FLP

Friedlander dominated and controlled the market for eNote common stock on each of those days, where his purchases accounted for 80% or more of the retail purchase volume.

Friedlander, FML and FCMC Misappropriated $2.3 Million of the Fund's Assets

43. FML receives shares in the Hedge Fund on a monthly basis as partial compensation for managing the Hedge Fund, and holds those shares for the benefit of FCMC. The number of shares received is based upon the NAV of the Hedge Fund.

44. Between August 2000 and February 2001, redemptions in the amount of approximately $2.4 million were wired from the Hedge Fund account at Bear Stearns to a Citibank account in the name of FCMC, including a $1M transfer on February 5, 2001, which was used solely for Friedlander's personal expenses. The remainder of these proceeds has been used for his personal expenses, to fund loans made by FCMC to eNote, and conduct the business of FCMC.

45. The redemptions made by FML for the benefit of FCMC were based upon inflated NAV caused by the misrepresentation of the value of eNote securities and by the manipulative devices set forth above, and have benefited FCMC and Friedlander to the detriment of the remaining shareholders in the Hedge Fund. Friedlander personally profited by increasing the rate and amount of the share redemptions during the period of the fraud.

46. In May 2000, Friedlander sent letters and memoranda to some investors in the Hedge Fund , which state that there was an earlier overvaluation of the eNote holdings and that the SEC was conducting an investigation. Friedlander announced his intention to liquidate the Hedge Fund. He failed to inform the investors of the inflated and preferential redemptions earlier received by himself and FCMC, and gave no assurances that such preferential treatment would not continue during the liquidation process. He also represented that the SEC investigation was focused on eNote, rather than on himself, and his entities, including the Hedge Fund.

THE SECOND FRAUDULENT SCHEME

47. From 1994 through at least 2000, Friedlander solicited money from individuals and entities to invest for the benefit of those individuals and entities. In doing so, Friedlander represented that he would manage such funds as a "pooled" investment or pooled fund, combining the investors' money in one or more securities accounts, for the purpose of buying and selling securities.

48. From 1994 through 2000, at least seven individuals and three entities gave money to Friedlander to invest in the pooled fund pursuant to an investment advisory services agreement ("investment agreement"). According to these investment agreements, the investors in the pooled fund would share in the fund's returns on a pro rata basis, with certain management and/or performance fees deducted. The investment agreements also required Friedlander to maintain the pooled fund assets in one or more brokerage accounts and to provide periodic reports of the investor's return.

49. From 1994 through 2001, Friedlander represented to investors in the pooled fund that he was investing their money in accordance with the investment agreements by buying and selling securities for the benefit of all investors in the pooled fund.

50. From at least 1995 through 2001, Friedlander represented to investors in the pooled fund that their returns were positive and that their principal was secure. He did so even after two investors questioned him about the Commission's original complaint filed in this action in May 2001.

51. Until at least 2000, Friedlander continued to solicit investments in the pooled fund, making false representations -- both written and oral -- about profitable returns and increasing account balances. At the times he made such representations, Friedlander knew or was reckless in not knowing that investors would rely upon his representations in deciding whether to stay invested in the pooled fund and/or whether to invest additional funds.

52. Based upon Friedlander's representations, existing pooled fund investors and other individuals made additional investments in the pooled fund from 1998 through 2000. During this period, investors also relied upon Friedlander's false representations in deciding not to redeem their interests in the pooled fund.

53. In 2002, Friedlander informed investors in the pooled fund that their investments were worth nothing and that the total loss was due to investments he had made for their benefit in eNote.com, a company in which he had a controlling interest.

54. The pooled fund investors were surprised by this apparent turn of events. In early 2001, Friedlander had forwarded a compilation report showing another profitable year and, throughout 2001, he had assured some investors that their principal was secure and that they had lost no money.

False and Misleading Compilation Reports

55. In or around January 1995, Friedlander retained the Stamford, Connecticut office of KPMG to prepare compilation reports of the gains or losses of each pooled fund investor for investor portfolio and tax purposes. In undertaking this engagement, KPMG reviewed the brokerage account statements for the pooled account, as well as other documents provided by Friedlander, and calculated each investors' return.

56. In early 1995, KPMG prepared the compilation reports for each investor for 1994. In these compilation reports, KPMG set forth year-end investment results, including information on the management fee and instructions on tax reporting. The compilation reports were five pages in length, several pages of which were on "KPMG Peat Marwick" letterhead. The reports were also signed "KPMG Peat Marwick LLP."

57. In or around March 1995, KPMG forwarded the compilation reports for 1994 to Friedlander, who forwarded the reports to the investors in the pooled fund. These reports were consistent with the assets held in FCMC's securities account at Gruntal at the end of 1994.

58. Following the engagement in early 1995, KPMG performed no further services for Friedlander or any entity controlled by Friedlander.

59. During 1995, the FCMC account at Gruntal suffered significant losses.

60. In the early months of each year from 1996 through 2001, Friedlander directed the preparation of year-end compilation reports for the pooled fund investors for the prior year, and caused the compilations reports to be forwarded to the investors.

61. The compilation reports prepared each year from 1996 through 2001 were in the same form, were the same length, and used the same wording as those prepared by KPMG in 1995. The compilation reports prepared each year from 1996 through 2001 were also on "KPMG Peat Marwick" letterhead and, at least for the years ended 1999 and 2000, were signed "KPMG Peat Marwick LLP."

62. KPMG did not prepare or assist in preparing the compilation reports forwarded by Friedlander between 1996 and 2001. KPMG also did not authorize the use of its letterhead, nor did it sign or approve any of these compilation reports. In fact, KPMG had ceased using "Peat Marwick" in its name, including on its letterhead, in late 1998.

63. Prior to forwarding the compilation reports to investors in the pooled fund, Friedlander reviewed the reports. At the time he forwarded or caused the post-1995 reports to be forwarded, Friedlander knew or was reckless in not knowing that KPMG had not prepared or assisted in preparing these reports. Nevertheless, Friedlander caused the reports to be transmitted on "KPMG Peat Marwick" letterhead to pooled fund investors, who believed that the reports had been compiled and reviewed by KPMG.

64. From 1996 through 2001, the compilation reports for the prior fiscal years that Friedlander provided to investors in the pooled fund were false and misleading because they had not been prepared by, at the direction of, or with the knowledge of KPMG. Friedlander knew, or was reckless in not knowing, that the pooled fund investors would rely upon the implicit representation that KPMG had prepared the reports.

65. From at least 1999 through 2001 (for the fiscal years 1998 through 2000), the compilation reports that Friedlander provided to the investors were false and misleading because they overstated the value of investors' assets and returns, and were not based upon the actual assets held in FCMC securities accounts. Specifically:

  1. a. The compilation reports forwarded to investors by Friedlander in 1999 (for the year ended 12/31/98) represented total pooled fund assets of more than $3.29 million. However, based upon brokerage and bank statements, the pooled fund had assets of less than $1.86 million.
  2. b. The compilation reports forwarded to investors by Friedlander in 2000 (for the year ended 12/31/99) represented total pooled fund assets of more than $4.75 million. Based upon brokerage and bank statements, the pooled fund had assets of less than $245,000.
  3. c. The compilation reports forwarded to investors by Friedlander in 2001 (for the year ended 12/31/00) represented total pooled fund assets of more than $5.74 million. Based upon brokerage and bank statements, the pooled fund had assets of less than $269,000.

66. Friedlander knew or was reckless in not knowing that the amount of assets and the investment returns reflected in the compilations reports were false and misleading. Friedlander also knew or was reckless in not knowing that the pooled fund investors would rely on the compilation reports and make investment decisions accordingly.

Friedlander Converted the Pooled Fund Assets for His Personal Use

67. Starting by at least January 1996, Friedlander commingled the assets of the pooled fund with those of defendant corporation FCMC.

68. From at least January 1998 through 2000, Friedlander failed to deposit all new investments from pooled account investors into securities accounts for the benefit of those investors. Instead, as a general rule, Friedlander left the investors' money in the non-interest bearing bank account of FCMC at Citibank, NA, where those funds were commingled with money derived from other activities of Friedlander and FCMC. Friedlander used the commingled money to pay for personal expenses, including country club dues, legal fees associated with a prior divorce, maintenance and dockage fees for a sailboat, and monthly condominium fees. Friedlander also used money from new investments in the pooled fund to repay pooled fund investors who wished to redeem, to pay other individuals for whom he claimed to be managing money, and to fund loans to family members and/or friends.

69. From 1998 through 2001, Friedlander used at least $1.4 million from commingled money in the FCMC bank account for personal expenses, and an additional $879,000 to pay for the operations of FCMC.

70. From at least 1998 through 2001, Friedlander failed to maintain any system or process for tracking the money deposited by pooled fund investors from 1998 through 2000. In most cases, Friedlander made no effort to invest this money. Further, he represented to investors that he had invested their money profitably during this time. Friedlander knew that these representations were false and knew that the investors relied on these representations.

FIRST CLAIM

Violations of 17(a) of the Securities Act

Misrepresentation of NAV by Defendants Friedlander,

The Hedge Fund, FML and FCMC

71. The SEC realleges and incorporates by reference the allegations contained in Paragraphs 1 through 70, above.

72. In knowingly or recklessly misrepresenting the NAV of the Hedge Fund, the defendants Friedlander, the Hedge Fund, FML and FCMC, in the offer or sale of securities, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, not misleading; or (c) engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities.

73. In knowingly or recklessly misrepresenting the net assets of, and the value of each investor's interest in, the pooled fund, the defendants Friedlander and FCMC, in the offer or sale of securities, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, directly or indirectly: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, not misleading; or (c) engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities.

74. By reason of the foregoing, defendants violated Section 17(a) of the Securities Act.

SECOND CLAIM

Violations of Section 10(b) of the Exchange Act and Rule 10b-5

Misrepresentation of NAV by Defendants Friedlander,

The Hedge Fund, FML and FCMC

75. The SEC realleges and incorporates by reference the allegations contained in Paragraphs 1 through 74, above.

76. In knowingly or recklessly misrepresenting the NAV of the Hedge Fund, the defendants Friedlander, the Hedge Fund, FML and FCMC, directly or indirectly, by use of the means or instruments of interstate commerce, or of the mails, or of a facility of a national securities exchange, knowingly or recklessly: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of securities and upon other persons, in connection with the purchase or sale of a security.

77. In knowingly or recklessly misrepresenting the net assets of, and the value of each investor's interest in, the pooled fund, the defendants Friedlander and FCMC, directly or indirectly, by use of the means or instruments of interstate commerce, or of the mails, or of a facility of a national securities exchange, knowingly or recklessly: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of securities and upon other persons, in connection with the purchase or sale of a security.

78. By reason of the foregoing, the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

THIRD CLAIM

Violations of Section 10(b) of the Exchange Act and Rule 10b-5

Manipulation of eNote Stock Price by Defendants Friedlander, FCMC,

Opal and FLP

79. The SEC realleges and incorporates by reference the allegations contained in Paragraphs 1 through 78, above.

80. In carrying out their scheme to manipulate the price of eNote common stock, the defendants Friedlander, FCMC, Opal and FLP, directly or indirectly, by use of the means or instruments of interstate commerce, or of the mails, or of a facility of a national securities exchange, knowingly or recklessly: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, transactions, practices, and courses of business which operated or would operate as a fraud or deceit upon the purchasers of securities and upon other persons, in connection with the purchase or sale of a security.

81. By reason of the foregoing, the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

FOURTH CLAIM

Violations of Section 206 of the Investment Advisors Act

by Defendants Friedlander, FML and FCMC

82. The SEC realleges and incorporates by reference the allegations contained in Paragraphs 1 through 81, above.

83. Defendants Friedlander, FML and FCMC acted as investment advisers to the Hedge Fund. For compensation, they engaged in the business of advising the Hedge Fund and its investors, directly and through publications and writings, as to the value of securities and as to the advisability of investing in, purchasing, or selling securities.

84. In misrepresenting the NAV of the Hedge Fund, defendants Friedlander, FML and FCMC, with the intent to deceive, manipulate of defraud, by the use of the mails or any means or instrumentality of interstate commerce, directly or indirectly: (1) employed devices, schemes, or artifices to defraud a client or prospective client; and (2) engaged in transactions, practices, or courses of business which operated as a fraud or deceit upon a client or prospective client.

85. Defendants Friedlander and FCMC acted as investment advisers to the pooled fund. For compensation, they engaged in the business of advising the pooled fund and its investors, directly and through publications and writings, as to the value of securities and as to the advisability of investing in, purchasing, or selling securities.

86. In misrepresenting the assets of the pooled fund, defendants Friedlander and FCMC, with the intent to deceive, manipulate of defraud, by the use of the mails or any means or instrumentality of interstate commerce, directly or indirectly: (1) employed devices, schemes, or artifices to defraud a client or prospective client; and (2) engaged in transactions, practices, or courses of business which operated as a fraud or deceit upon a client or prospective client.

87. By reason of the foregoing, defendants Friedlander, FML and FCMC violated Sections 206(1) and (2) of the Advisers Act.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff SEC respectfully requests that this Court enter a Final Judgment:

1. finding that Friedlander, the Hedge Fund, FML, FCMC, Opal and FLP have violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10b-5 of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. §240.10b-5, and that Friedlander and FCMC have violated Section 206(1) and (2) of the Investment Advisors Act, 15 U.S.C. § 80b-6.

2. permanently enjoining Friedlander, the Hedge Fund, FML, FCMC, Opal and FLP from further violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10b-5 of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. §240.10b-5;

3. permanently enjoining Friedlander, FML and FCMC from violating Section 206(1) and (2) of the Investment Advisors Act, 15 U.S.C. § 80b-6;

4. ordering Friedlander, the Hedge Fund, FML, FCMC, Opal and FLP to account for and to disgorge any ill-gotten gains realized from the conduct alleged herein and to pay prejudgment interest thereon;

5. ordering Friedlander, FML, and FCMC to pay civil penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and

6. granting such other relief as the Court deems just and proper.


Dated: October ___, 2003
Washington, D.C.

__________________________
Kathleen A. Ford (KB-4596)
Assistant Chief Litigation Counsel
Attorney for Plaintiff
Securities and Exchange Commission
450 Fifth Street, N.W
Washington, D.C. 20549-0911
(202) 942-2787 (Ford)
(202) 942-9581 (facsimile)

Of Counsel:

Brian A. Ochs
Douglas C. McAllister
Matthew G. Finnegan


http://www.sec.gov/litigation/complaints/comp18426.htm


Modified: 10/24/2003