The Commission announced today that it filed an amended complaint against Burton G. Friedlander, 64, a resident of Greenwich, Connecticut, and the corporation that he owned and operated, Friedlander Capital Management Corporation, in a case alleging securities fraud pending in the United States District Court for the Southern District of New York. In its amended complaint, the Commission brings new charges that Friedlander defrauded investors in a pooled investment fund by materially misrepresenting the status and value of investor assets in the pooled fund and knowingly converting over $2 million of investors' money for his own use and benefit. The Commission further alleges that Friedlander caused the preparation and dissemination of false asset reports that included the unauthorized use of the letterhead of a major accounting firm that had no involvement in the creation of the false asset reports.
Regarding Friedlander's misrepresentations, the amended complaint alleges that Friedlander misled investors in the pooled fund regarding their assets in the fund at the end of 1998, 1999 and 2000. For 1998, the asset reports forwarded to investors by Friedlander represented total pooled fund assets of more than $3.29 million. However, the pooled fund had assets of less than $1.86 million. For 1999, the asset reports forwarded to investors by Friedlander represented total pooled fund assets of more than $4.75 million, when the pooled fund had assets of less than $245,000. For 2000, the asset reports forwarded to investors by Friedlander represented total pooled fund assets of more than $5.74 million, when the pooled fund had assets of less than $269,000.
With regard to conversion, the amended complaint alleges that, starting in at least 1998, Friedlander failed to invest all new money deposited in the pooled fund. Instead, Friedlander generally commingled money from pooled fund investors with money derived from Friedlander's other activities. The amended complaint alleges that Friedlander used the commingled money to pay for personal expenses, including country club dues, personal legal fees, maintenance and dockage fees for a sailboat, and condominium fees. From 1998 through 2001, Friedlander used at least $1.4 million of commingled money for personal expenses, and an additional $879,000 to pay for the operations of his company. Friedlander also used money from new investments in the pooled fund to repay pooled fund investors who wished to redeem and to pay other individuals for whom he claimed to be managing money.
The amended complaint also alleges that, from 1996 through 2001, Friedlander provided pooled fund investors with false asset reports, portions of which were on the letterhead of KPMG Peat Marwick LLP. However, KPMG did not prepare or assist in preparing those asset reports. KPMG also did not authorize the use of its letterhead, nor did it sign or approve any of these asset reports. In fact, KPMG had dropped "Peat Marwick" from its name in late 1998.
The Commission filed its original complaint in May 2001, alleging fraud in connection with Friedlander's management of the assets of Friedlander International Limited, an overseas hedge fund. The Commission alleged that Friedlander inflated the hedge fund's net asset value by improperly and arbitrarily valuing certain unlisted securities of a company in which Friedlander and entities he controlled had heavily invested. The Commission's complaint also alleged that Friedlander engaged in "portfolio pumping" by purchasing a thinly traded common stock as part of a manipulative scheme to inflate the value of that stock and to inflate the hedge fund's net asset value. SEC Litigation Release No. 17021 (June 1, 2001). These allegations remain unchanged in the amended complaint.
In December 2001, Judge Kimba M. Wood granted a preliminary injunction against Friedlander and the related entities. Judge Wood also appointed a receiver for the entities. SEC Litigation Release No. 17315 (January 15, 2002).
The amended complaint charges that Friedlander and Friedlander Capital Management, based on the allegations described above, violated the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 (Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206 of the Advisers Act). The Commission seeks permanent injunctive relief against Friedlander and Friedlander Capital Management Corporation, accountings, disgorgement of ill-gotten gains, civil monetary penalties, and other relief.
The Commission acknowledges the assistance and cooperation in its investigation of the Office of the United States Attorney for the Southern District of New York, which today announced criminal charges against Friedlander in connection with both schemes described in the Commission's amended complaint. In a related matter, the Commodity Futures Trading Commission has filed a complaint against Friedlander and Friedlander Capital Management Corporation in the United States District Court for the Southern District of New York in connection with the pooled investment fund.
