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SEC Cites League of Extraordinary Advisers In Denying Waiver of Bar
February 17, 2021
Perhaps you didn't know. Perhaps you were unaware. There is a League of Extraordinary Gentlemen pounding the pavement of Wall Street. I mean, sure, you're right, it's somewhat of a well-kept secret, which I've just blown by telling you. Now that the cat's out of the bag, I'll step back and let the Securities and Exchange Commission explain the secret society stuff.
The 2011 Complaint and Settlement
In 2011, the SEC filed a Complaint in the United States District Court for the Southern District of Texas https://www.sec.gov/litigation/complaints/2011/comp21901.pdf alleging that Daniel Sholom Frishberg, the Principal of registered investment adviser ("RIA") Daniel Frishberg Financial Services, Inc. ("DFFS") violated Section 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act. Without admitting or denying the allegations in the SEC Complaint, Frishberg consented to the entry of a permanent injunction against the alleged violations and he agreed to pay a $65,000 civil penalty. As alleged in part in SEC Sues Houston Businessman for Fraudulent Conduct in Connection with Investment Advisory Firm (SEC Release; Lit. Rel. No. 21901 / March 25, 2011)
https://www.sec.gov/litigation/litreleases/2011/lr21901.htm:
https://www.sec.gov/litigation/litreleases/2011/lr21901.htm:
The Commission alleges that DFFS, with Frishberg's approval, advised its clients to invest in notes issued by Kaleta Capital Management ("KCM"), a private company owned by Frishberg associate Albert Fase Kaleta, and by Business Radio Networks, L.P. d/b/a "BizRadio" ("BizRadio"), a struggling media company controlled by Frishberg and Kaleta. According to the complaint, Frishberg authorized Kaleta to offer the notes to clients, but failed to provide clients with critical disclosures. The Commission alleges, for example, that investors were not told of BizRadio's poor financial condition and likely inability to repay its notes. The Commission further alleges that investors were not told of Frishberg's significant conflicts of interest in the note offerings, such as the fact that the note proceeds funded BizRadio's operating expenses, including Frishberg's and Kaleta's salaries.
Following Frishberg's settlement, the SEC ordered his Bar from association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent. In the Matter of Daniel Sholom Frishberg, Respondent (Order Instituting Proceedings, Making Findings, and Imposing Remedial Sanctions, Investment Advisers Act of 1940 Rel. No. 3206; Admin. Proc. File No. 3-14393 / May 16, 2011)
https://www.sec.gov/litigation/admin/2021/ia-5682.pdf Further, as set forth in the May 2011 Order:
Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.
2019 Application for Affiliation
On August 9, 2019, Frishberg filed an application with the SEC requesting reinstatement although the SEC requested clarification as to the specifics of the proposed affiliation. In the Matter of Daniel Sholom Frishberg (Order Denying Application for Consent to Associate, Investment Advisers Act of 1940 Rel. No. 5682; Admin. Proc. File No. 3-14393)
https://www.sec.gov/litigation/admin/2021/ia-5682.pdf
Apparently the proposed affiliation fell through per Frishberg's January 2020 letter to the SEC, but on May 5, 2020, he disclosed a new offer of employment from a state-RIA "where he would be supervised by an individual whom Frishberg described as the firm's chief executive officer and chief investment officer. He also provided a statement from the proposed employer." at page 3 of the 2021 SEC Order.
Okay, so, sure, all well and fine, Frishberg proposes a substitution of one potential RIA employer for another. In the scheme of things, not that big a deal; however, the SEC noted that in 2014, Frishberg entered into a revised payment plan after not having paid off his $65,000 penalty via the ordered five installments by March 1, 2012; however, as of 2021 "Frishberg has not complied with that plan and part of the civil penalty remains unpaid." at page 2 of the 2021 SEC Order. Howsabout we file that under dramatic foreshadowing?
The League of Extraordinary Advisers?
In considering Frishberg's application, the SEC characterized his sanction as an "unqualified bar," Given that "unqualified" designation for the Bar, the federal regulator reiterated its policy that the default regulatory response was that the public interest was best served by a permanent exclusion from reentry into the securities industry absent extraordinary circumstances. The SEC summarized Frishberg's application as arguing two reasons for permitting his reentry:
(1) he would be able to earn a living and thereby pay his outstanding civil penalty more quickly than if he was not employed in the securities industry; and (2) the services he would offer to clients would benefit the community.
Just a thought here but, you know, I'm not sure that Frishberg put his best foot forward by arguing to the SEC that he should be readmitted to the industry so that he will be better able to honor his now-failed promise to timely pay a fine -- and that argument becomes even more dubious when you consider that Frishberg is asking to return to the very industry from which he was barred for misconduct. Sure -- if that's all you got, go with it. On the other hand, Frishberg's argument comes off as little more than a variation on the parricide asking for the court's mercy because he is now an orphan. Be that as it may, the SEC's response was as jaundiced as mine [Ed: footnote omitted]:
at Page 4 of the 2021 SEC OrderFrishberg's focus on the possibility that he will be able to pay (or pay more quickly) the outstanding balance on the civil penalty imposed in 2011, and the possible resulting benefit to investors injured by his misconduct, is insufficient to demonstrate extraordinary circumstances. See Matthew D. Sample, supra, 2015 WL 5305992, at *7 (finding no extraordinary circumstances where applicant argued he would be more likely to be in position to repay injured investors if his application were granted). More generally, we have not found the financial consequences of lack of employment in the securities industry to be a persuasive reason for granting consent to associate. And while investment advisory services can be beneficial to investors, the additional benefit to the public of one additional associated person at a state-registered adviser is not a sufficient basis for granting relief.
Having shot one of the two shells in his shotgun, Frishberg's second, and last shot, is that his permitted affiliation will benefit the community. Not exactly the stuff of an "extraordinary circumstance" as I see it. Oh my. Sort of shooting blanks here -- no?
The SEC addresses Frishberg's community-benefit prong by first noting that his application is largely devoid of such critical details as "how he would be employed by the adviser or how he would be interacting with investors, and does not provide a plan for supervision to prevent recurrence of his violative conduct." at Page 4 of the 2021 SEC Order. Further, the SEC explains that the lack of such details prevents it from finding that Frishberg would avoid the recurrence of the violative activities that prompted the imposition of the Bar in 2011. Similarly, the SEC then considers the lack of substance in the Statement submitted by Frishberg's proposed employer [Ed: footnote omitted]:
[T]he employer's statement does not detail the terms and conditions of employment or the supervision to be exercised over Frishberg, and is limited to generalities. The employer represents that the firm does "not allow borrowing money from clients for any reason" and that Frishberg's proposed supervisor examines and approves "every document and contract submitted to or signed by clients." In addition, "all investment decisions are made in writing," and the supervisor "personally approve[s] the recommendations as well as all investment decisions made with discretion on behalf of the clients of our firm." But the statement does not detail the terms and conditions of the proposed employment or describe the day-to-day means by which Frishberg would be supervised.
at Page 5 of the 2021 SEC Order
An Additional Factor
Not unexpectedly, the SEC pounded one more nail into the coffin:
Finally, Frishberg's failure to satisfy the outstanding judgment in the Commission's civil enforcement action is an additional factor indicating that the proposed association would not be consistent with the public interest.
at Page 5 of the 2021 SEC Order
Denied
The SEC denied of Frishberg's proposed association. Frankly, it's tough to argue with the decision. Not only did Frishberg fail to show the prerequisite "extraordinary circumstances," but his application was hamstrung by a woeful lack of detail.