UNITED STATES OF AMERICA
In the Matter of
FREDERICK A. WOLF,
ORDER MAKING FINDINGS,
The Securities and Exchange Commission ("Commission") previously instituted a public administrative and cease-and-desist proceeding against Frederick A. Wolf ("Wolf") pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"). Wolf subsequently submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept.
Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein except that Wolf admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Wolf consents to the issuance of this Order Making Findings and Imposing a Cease-and-Desist Order and Sanctions Against Frederick A. Wolf ("Order") and to the entry of the findings and the imposition of the relief set forth below. 1
On the basis of this Order and Wolf's Offer, the Commission finds:
A. Frederick A. Wolf ("Wolf"), age 47, was the President of Valley Forge Barrington at all relevant times. Wolf resides in Sterling Heights, Michigan, a suburb of Detroit.
B. Valley Forge Barrington, Ltd. ("Barrington"), is a Michigan corporation and has been a registered investment adviser with the Commission since 1986. Barrington became a wholly-owned subsidiary of Valley Forge Capital Holdings, Inc ("VFCH") in April 1994. As of March 1996 it had 340 clients with $78,827,000 under management. Barrington appears to be the only subsidiary of VFCH with any active business operations.2 Barrington is located in Southfield, Michigan, a suburb of Detroit.
C. VFCH purchased Barrington in January 1994. Immediately thereafter Barrington began promoting VFCH securities to its advisory clients. Between January 1994 and July 1996, Barrington clients purchased $2.2 million in VFCH securities. Wolf was responsible for all of these purchases, either by recommending VFCH to his clients or by using his discretionary trading authority in certain client accounts to effectuate the purchases.
D. Wolf became a member of the Board of Directors of VFCH in March 1996.
E. From February 1994 to September 1996, VFCH raised $4.2 million through three private placement offerings. The misconduct alleged in this proceeding against Barrington and Wolf involves, in part, Barrington's recommending and purchasing for its clients securities from two of these offerings, the First Offering and the Second Offering. The Second Offering involved two separate series of bonds, referred to as Series A and Series B.
F. In December 1993, VFCH commenced the First Offering, which consisted of $400,000 of ten-year, 9.5% Debentures and $600,000 of Class A Non-Voting Common Stock. VFCH raised approximately $894,000 from the First Offering. An offering memorandum for the First Offering stated that VFCH would use the offering proceeds for certain purposes as a percentage of the maximum amount of securities offered. Applying those percentages to the amount of securities VFCH actually sold, the offering memorandum represented that VFCH would use the offering proceeds approximately as follows: (i) $312,900 to operate four financial service provider subsidiaries of VFCH; (ii) $301,278 to acquire certain assets from another company; (iii) $44,700 for working capital; (iv) $159,132 for offering expenses, sales commissions and interest reserves; (v) $52,746 to acquire additional companies; and (vi) $23,244 to retire advances from affiliates. The offering memorandum also disclosed that the securities being offered were speculative and involved a high degree of risk.
G. In March 1994, VFCH commenced the Second Offering Series A, which consisted of $3,000,000 of 8.5% convertible bonds maturing ten years after issuance. VFCH raised approximately $933,744 from the Second Offering Series A. An offering memorandum for the Second Offering Series A stated that VFCH would use the offering proceeds for certain purposes as a percentage of the maximum amount of securities offered. Applying those percentages to the actual amount of securities VFCH actually sold, the offering memorandum represented that VFCH would use the offering proceeds approximately as follows: (i) $18,675 for working capital needs; (ii) $93,374 for offering expenses and selling commissions; and (iii) $821,695 to acquire additional companies. The offering memorandum also disclosed that the securities being offered were speculative and involved a high degree of risk.
H. In July 1994, VFCH commenced the Second Offering Series B, which consisted of $2,066,256 of 9.5% convertible bonds maturing ten years after issuance. VFCH raised approximately $2,066,256 from the Second Offering Series B. An offering memorandum for the Second Offering Series B stated that VFCH would use the offering proceeds for certain purposes as a percentage of the maximum amount of securities offered. Applying those percentages to the amount of securities VFCH actually sold, the offering memorandum represented that VFCH would use the offering proceeds approximately as follows: (i) $661,202 for working capital needs; (ii) $206,625 for offering expenses and selling commissions; and (iii) $1,198,429 to acquire additional companies. The offering memorandum also disclosed that the securities being offered were speculative and involved a high degree of risk.
I. In at least two cases, Wolf used his discretionary authority to purchase VFCH securities even though such high-risk investments were contrary to his clients' stated investment objectives. In other cases, Wolf recommended that clients purchase VFCH securities without disclosing the high-risk nature of the securities. In addition, beginning in July 1994 Barrington and Wolf were aware of red flags concerning the integrity of VFCH management and the truthfulness of its representations as to how it would use the offering proceeds. Barrington and Wolf ignored the red flags and used their discretionary authority to purchase VFCH securities for their clients. Barrington and Wolf also failed to disclose these red flags to other clients to whom they recommended the VFCH securities.
J. For example, the Michigan Education Special Services Association ("MESSA") had a written investment policy that limited its fixed-income investments to securities rated "A" or higher, thus ruling out investments in high risk, unrated securities such as those offered by VFCH. MESSA's Executive Director provided Wolf with a copy of MESSA's written investment policy prior to July 1995. Despite this, between July 1995 and September 1996, Wolf used his discretionary authority to purchase $1,015,000 in VFCH securities for MESSA's account. Wolf made these purchases without any prior notification to, or approval from, MESSA. Barrington and Wolf failed to provide MESSA with any offering materials for the VFCH securities and did not otherwise disclose the high-risk and speculative nature of the VFCH securities to MESSA.
K. Similarly, in July 1995, Wolf used his discretionary authority to purchase $50,000 in VFCH's Second Offering Series B bonds on behalf of Richard Dalman. Dalman had no prior knowledge of this purchase and Barrington and Wolf never provided Dalman with any offering materials for the Series B bonds. Prior to this purchase Dalman told Wolf that his investment objectives were preservation of capital and liquidity.
L. In other instances, Barrington and Wolf recommended VFCH securities to their clients without disclosing the high-risk nature of the investment. Diane Bogdanski invested a total of $115,000 in VFCH's First and Second Offering in three separate transactions from March through May of 1994. Prior to making these investments, Bogdanski informed Wolf that she had a conservative investment strategy. Wolf never provided Bogdanski with any offering materials for the VFCH securities and did not otherwise disclose that the securities were high-risk and speculative. To the contrary, Wolf told Bogdanski that the VFCH securities were "very safe."
M. Dr. Robert Lum invested a total of $90,000 in VFCH's First and Second Offerings. Wolf never provided Lum with any offering materials for the VFCH securities and did not otherwise disclose that the securities were high risk and speculative. To the contrary, Wolf told Lum that VFCH was a "great investment" and "solid as a rock." Moreover, when Lum questioned Wolf about the liquidity of the securities, Wolf told Lum that VFCH would "go public" in two to three months. Wolf had no reasonable basis for this statement.
N. In addition to the risks outlined in the VFCH offering memoranda, as early as July 1994 Wolf became aware of other facts that should have caused him to question seriously the integrity of VFCH management and its representations about how it would use the proceeds from its securities offerings.
O. In early to mid-1994, Wolf was pressured by Tang and others on more than one occasion to arrange sales of CCFG securities to Barrington's advisory clients. At that time, Tang was a co-owner of CCFG. In addition, at that time, Wolf believed that Tang controlled VFCH, based on her ability to exert significant influence over VFCH's officers and employees. Tang threatened to throw Barrington into bankruptcy. Similarly, Mello (then VFCH's President), threatened to put Barrington into bankruptcy if Wolf did not provide investors.
P. In July 1994, while Wolf was on vacation, an employee of Broad Street Securities BSS ("BSS"), a brokerage controlled by Tang which then shared office space with Barrington, purchased a total of $100,000 of CCFG securities for three Barrington clients without Wolf's prior knowledge or permission. When Wolf returned from his vacation and requested that Tang repay his clients, he was told the money was gone. At the time this incident occurred, Wolf believed that the BSS employee had acted on instructions from Tang. Over two years later, Wolf still maintained this belief and affirmed it in a letter to a VFCH officer.
Q. By November 1994, Wolf believed that CCFG was near bankruptcy and that it was unlikely that the company would make any future interest payments on its securities. In addition, a memorandum from Barrington's files comments on the fact that by that time Tang was the subject of an Commission enforcement action relating to her conduct at CCFG. The memorandum states that one of the claims in the enforcement action against Tang is for alleged misrepresentations in connection with the sale of the CCFG securities, including misrepresentations as to how CCFG would use the proceeds of its offerings.
R. In about April 1995, Wolf received and reviewed VFCH's 1994 financial statements. Those statements show that VFCH raised approximately $1.8 million in fiscal 1994 through the sale of debt securities in the First and Second Offerings. Wolf knew that during 1994 VFCH had spent no more than approximately $500,000 to acquire Barrington and to provide seed money for a mutual fund. However, according to VFCH's 1994 financial statements the Company had only $30,522 in cash remaining; in other words, the 1994 financials showed that VFCH had used virtually all the remaining offering proceeds, some $1.3 million, without acquiring any other financial service companies.
S. Also in or about April 1995, Wolf reviewed separate 1994 financials for Barrington, which posted a loss for the year. Prior to its acquisition by VFCH, Barrington had always reported a profit and Wolf believed at the time that Barrington's expenses, as reflected in the 1994 financial statements prepared by VFCH, did not accurately reflect Barrington's operations.
T. Of the $2.2 million in VFCH securities purchased by Barrington clients, nearly two-thirds were purchased after April 1995, when Wolf was aware of all of the facts discussed in paragraphs J through N. However, Wolf failed to disclose any of these facts to Barrington advisory clients such as Bogdanski and Lum, to whom Wolf recommended VFCH securities. Similarly, Barrington and Wolf failed to act in the best interests of Barrington clients such as MESSA and Dalman when Wolf used his discretionary authority to purchase VFCH for these clients despite his knowledge of these significant red flags.
U. Between September 1993 and July 1994, seven of Barrington's advisory clients purchased a total of $250,000 in securities of Tang's former venture, CCFG. Wolf made at least two of these purchases using his discretionary trading authority.
V. CCFG ceased making interest payments to investors in approximately July 1994. By November 1994 Wolf believed that CCFG was near bankruptcy and was concerned that he would lose at least one of his clients, Dalman, if Dalman became aware of CCFG's financial condition and its inability to meet its interest payment obligations. As a result, near the end of 1994 Wolf recommended to a consultant to VFCH, who was also an officer and promoter of CCFG, that the consultant make the interest payments to certain Barrington clients purportedly on behalf of CCFG.
W. Two sets of lulling payments, totaling $5,000 each, were made in January 1995 and again in July 1995. At the time of these payments, Barrington concealed from its clients the fact that CCFG was not the source of the payments.
X. Despite Wolf's knowledge that CCFG was near bankruptcy in November 1994, and that there was no real possibility that CCFG would make interest payments to investors, Barrington continued to value its clients' total investments in CCFG securities at $250,000, the initial cost of the securities, as late as July 1996. Between November 1994 and July 1996, Barrington charged and collected from at least two clients advisory fees purportedly based on a percentage of the fair market value of client assets. Assets on which fees were charged, however, included the improperly overvalued CCFG securities. The amount of advisory fees overcharged was approximately $1,000.
Y. In the first half of 1995, one of Barrington's advisory clients demanded that Barrington and Wolf refund her investments in three bonds from VFCH's First and Second Offerings totaling $115,000. To placate his client, Wolf arranged for the sale of $115,000 of securities from VFCH's First and Second Offerings to other of his advisory clients in July 1995. Proceeds of the subsequent sales were immediately used to pay off the first client as follows:
|1st Client||A. Subsequent Clients|
|$40,000 in First Offering||Paid off with||$40,000 in Second Offering|
|$50,000 in First Offering||Paid off with||$50,000 in Second Offering|
|$25,000 in First Offering||Paid off with||$25,000 in Second Offering|
Z. Wolf used his discretionary authority to make the $40,000 and $50,000 purchases on behalf of MESSA, and did not inform MESSA that proceeds from its purchases would be used to pay off a prior disgruntled investor.
AA. Wolf never informed Lum, a co-holder of the account that made the $25,000 subsequent purchase in the First Offering, that proceeds from his purchases would be used to pay off a prior disgruntled investor. Barrington's purchase for Lum of securities from VFCH's First Offering came more than a year after VFCH had supposedly rescinded the First Offering.
BB. Section 206(1) of the Advisers Act prohibits an investment adviser from employing "any device, scheme, or artifice to defraud any client or prospective client." Section 206(2) of the Advisers Act prohibits an investment adviser from engaging in "any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client." Section 206(1) requires a showing of scienter (SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992)); Section 206(2) does not. Id., at 643, citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963). Based upon the conduct described above, Barrington violated Sections 206(1) and 206(2) of the Adviser's Act and Wolf willfully aided and abetted and caused these violations.
CC. Wolf has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay a civil penalty. The Commission has reviewed the sworn financial statement and other evidence provided by Wolf and has determined that he does not have the financial ability to pay a civil penalty.
Based upon the foregoing, the Commission deems it appropriate in the public interest to impose the sanctions specified in Wolf's Offer: Accordingly,:
(1) IT IS ORDERED that Wolf is suspended from association with any investment adviser for a period of twelve (12) months;
(2) IT IS ORDERED that, pursuant to Section 203(k) of the Advisers Act, Wolf cease and desist from committing or causing any violation and any future violation of Sections 206(1) and 206(2) of the Advisers Act;
(3) IT IS FURTHER ORDERED that the Division of Enforcement may, at any time following the entry of the Order, petition the Commission to: (1) reopen this matter to consider whether Wolf provided accurate and complete financial information at the time such representations were made; (2) determine the amount of civil penalty to be imposed against Wolf; and (3) seek any additional remedies against Wolf that the Commission would be authorized to impose in this proceeding if his offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of a civil penalty to be imposed and whether additional remedies should be imposed. Wolf may not, by way of defense to such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding.
By the Commission.
Jonathan G. Katz
|1||The findings in this Order are made pursuant to Wolf's Offer and are not binding on any other person or entity named as a respondent in this or any other proceeding.|
|2||After the events described, VFCH and Barrington were acquired by a new owner and renamed. This Order addresses them by the names they had during the time relevant to this action.|
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