SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17021 \ June 1, 2001
SEC v. BURTON G. FRIEDLANDER, FRIEDLANDER INTERNATIONAL LIMITED, FRIEDLANDER MANAGEMENT LIMITED, FRIEDLANDER CAPITAL MANAGEMENT, FRIEDLANDER LIMITED PARTNERSHIP, AND OPAL INTERNATIONAL FUND, Civil Action No. 01 Civ. 4658 (S.D.N.Y.)
SEC FILES FRAUD CHARGES AGAINST HEDGE FUND MANAGER FOR MARKET MANIPULATION AND "PORTFOLIO PUMPING."
Yesterday, the Commission filed securities fraud charges against Burton G. Friedlander, 62, two investment management entities Friedlander controls, and three Friedlander-managed investment funds. The defendants are charged with market manipulation and with fraudulently inflating and misrepresenting the value of one of the funds, Friedlander International Limited, a hedge fund. Among other things, the Commission charges that Friedlander manipulated the common stock of a company in which the hedge fund held an interest at the end of each month during the last five months of 2000. This conduct is commonly known as "portfolio pumping." The Commission alleges that Friedlander caused approximately $2.4 million in fund redemptions to be made at the inflated fund values for his and his entities' benefit to the detriment of the fund's other investors. The Commission seeks preliminary and permanent injunctions, an asset freeze against Friedlander, the appointment of a receiver, and other relief. The court has scheduled a hearing on June 19 on the Commission's request for a receiver and other emergency relief.
In its complaint, which was filed in the United States District Court for the Southern District of New York, the Commission alleges that, in April 1999, Friedlander caused Friedlander International Limited to purchase 5 million shares of preferred stock of eNote.com, a company that trades on the OTC Bulletin Board. The fund also obtained at that time a warrant to purchase 2 million shares of eNote common stock. eNote, located in Williston, Vermont, purports to be in the business of developing a system to allow access to e-mail through a television set. Subsequently, Friedlander Capital Management Corp., the Friedlander-controlled entity that manages Friedlander International Limited, became the principal source of funding for eNote, obtaining, among other things, warrants for approximately 11.7 million additional eNote shares through December 2000. Friedlander Capital Management purportedly gifted these to Friedlander International Limited. As a result, eNote securities constituted approximately 40 percent of the net asset value of Friedlander International reported to investors.
The complaint further alleges that, beginning in August 2000, Friedlander caused the month-end net asset value of Friedlander International Limited to be fraudulently inflated in two ways. First, Friedlander manipulated the month-end closing price of eNote common stock. The eNote common stock price was used to determine the value of the eNote preferred stock and warrants in the fund's portfolio. At the end of each month from August through December 2000, Friedlander and Friedlander Capital Mangement purchased large quantities of eNote common stock through brokerage accounts held for the benefit of Friedlander's other managed funds, Friedlander Limited Partnership, and Opal International Fund. To effect these purchases, Friedlander placed a series of orders at increasing prices on the last trading day of each month. Friedlander's purchases on these days accounted for 80% or more of the retail purchase volume in eNote. These purchases manipulated the eNote stock price upward at the end of each month, in some cases more than doubling it.
Second, for the months of November and December 2000, Friedlander assigned arbitrary values to the eNote warrants in the Friedlander International Limited portfolio that were higher even than the price of the underlying common stock.
The Commission's complaint alleges that Friedlander caused additional investors to subscribe to Friedlander International Limited at inflated net asset values. Further, between August 2000 and February 2001, Friedlander caused redemptions of more than $2.4 million from Friedlander International Limited for the benefit of himself and his entities. These redemptions were at inflated net asset values and were to the detriment of other investors. Among other relief, the Commission seeks an immediate freeze of $1 million in Friedlander's assets, representing an amount that Friedlander redeemed for his personal benefit in February 2001.
The complaint charges Friedlander and the related entities with violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. The complaint also charges Friedlander and his two mangement entities, Friedlander Capital Management and Friedlander Management Limited, with violations of Section 206(1) and (2) of the Investment Advisers Act of 1940. In the complaint, the Commission seeks preliminary and permanent injunctive relief against Friedlander and the other defendants, the appointment of a receiver for the related entities, an asset freeze, accountings, disgorgement of ill-gotten gains, and civil monetary penalties.