U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21178 / August 13, 2009
Securities and Exchange Commission v. Brantley Capital Management, LLC, Robert Pinkas, and Tab Keplinger, 1:09-CV-01906 (JSG) (N.D. Ohio)
SEC Charges Ohio-Based Investment Advisers Robert Pinkas and His Firm for Fraudulently Overstating Assets
The Securities and Exchange Commission today charged Ohio-based investment advisers Robert Pinkas and his firm Brantley Capital Management (BCM) with securities fraud for overvaluing assets in an investment portfolio they managed in order to generate higher investment advisory fees. The SEC also charged another BCM official.
The SEC alleges that BCM, Pinkas, and its former part-time CFO Tab Keplinger substantially overstated the value of equity and debt investments in two failing private companies that represented more than half of the investment portfolio of Brantley Capital Corporation, a New York-based investment company. The SEC further alleges that BCM, Pinkas, and Keplinger made material misrepresentations and failed to make required disclosures about the two companies to Brantley Capital’s board of directors, independent auditors, and investors.
During the alleged misconduct from 2002 to 2005, BCM was the investment advisory firm that managed the investment portfolio of Brantley Capital. According to the SEC’s complaint, Pinkas was the CEO of both Brantley Capital and BCM, and directed all of BCM’s investment decisions and valuation recommendations. Keplinger was the part-time CFO of both entities and generally acted at the direction of Pinkas.
The SEC’s complaint, filed in U.S. District Court for the Northern District of Ohio, alleges that BCM, through Pinkas and Keplinger, advised Brantley Capital’s board that its equity investment in Flight Options International (FOI) was worth $32.5 million. The value of Brantley Capital’s interest in FOI, which represented approximately 50 percent of its total investment portfolio, was derived primarily from FOI’s ownership interest in Flight Options LLC, a private airline that was consistently losing millions of dollars.
The SEC alleges that Pinkas and Keplinger understood that Flight Options faced severe financial difficulties, and Pinkas knew that it was able to remain in business only because another investor in Flight Options repeatedly loaned it money. Pinkas and Keplinger not only failed to disclose these financial difficulties to Brantley Capital’s board and investors, but they also misrepresented the financial performance of Flight Options to Brantley Capital’s board and its independent auditors, cited various false rationales to support their $32.5 million valuation, and concealed third-party valuations of Flight Options indicating that Brantley Capital’s investment in FOI was worth substantially less than what Pinkas and Keplinger were representing.
The SEC’s complaint also alleges that BCM, through Pinkas and Keplinger, directed Brantley Capital to overstate the value of its debt investments in Disposable Products Company (DPC), a now-defunct company that comprised 4 to 8 percent of Brantley Capital’s total investment portfolio. Pinkas and Keplinger repeatedly advised Brantley Capital’s board that DPC would repay most of these loans, when in fact DPC could not repay the loans because the company was losing ever-increasing amounts of money. DPC also consistently missed its financial targets by large margins, remained in business only because Brantley Capital continued to loan it money, and lacked sufficient assets to cover Brantley Capital’s loans in the event of liquidation. Despite knowing these facts and that the value of Brantley Capital’s loans to DPC were essentially worthless, Pinkas and Keplinger advised Brantley Capital’s board that only relatively minor write-downs of its loans to DPC were required.
From 2002 to 2005, BCM received more than $6.4 million in investment advisory fees from Brantley Capital, which were calculated as a percentage of Brantley Capital’s net asset value.
BCM and Pinkas are contesting the SEC’s charges.
Keplinger has agreed to settle the SEC’s charges without admitting or denying the allegations. He consented to the entry of a judgment enjoining him from violating the antifraud and other provisions of the securities laws, requiring him to pay a $50,000 penalty, and barring him from serving as an officer or director of any public company for five years. Keplinger also consented to the entry of a Commission order that will suspend him for five years from appearing or practicing before the Commission as an accountant and bar him for one year from associating with an investment adviser.
The Commission’s complaint specifically alleges that BCM violated Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5 and 13b2-1 thereunder; Investment Advisers Act Sections 206(1) and 206(2); and that he aided and abetted violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1 and 13a-13 thereunder.
The Commission’s complaint specifically alleges that Pinkas violated Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder; Investment Advisers Act Sections 206(1) and 206(2); and that he aided and abetted violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1 and 13a-13 thereunder; and Investment Advisers Act Sections 206(1) and 206(2).
The Commission’s complaint specifically alleges that Keplinger violated Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder; and that he aided and abetted violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 13a-1 and 13a-13 thereunder; and Investment Advisers Act Sections 206(1) and 206(2).