A look inside the indictment of Connecticut hedge fund manager Burton Friedlander reveals a portrait of a brazen liar who spent clueless investors' money on country club dues and the docking fees for his yacht.
Friedlander, who oversaw the fund Friedlander International Ltd., was indicted last week on criminal fraud charges by a federal grand jury. The criminal charges brought by James Comey, the U.S. attorney for the Southern District of New York, followed an updated civil complaint by the
Securities and Exchange Commission
, which first turned up the heat on the hedge fund manager in 2001.
The funds are currently frozen and investors are currently waiting to find out what -- if any -- money they'll get back.
The criminal complaint alleged that Friedlander simply stopped putting investors' money into his funds sometime in 1998, and instead used incoming cash as a slush fund for business and personal expenses. Friedlander reportedly paid country club dues, personal legal fees, maintenance and docking fees for a sailboat and monthly rent on a Florida condominium, the complaint alleged.
Friedlander consistently lied to investors in his funds, faking reports and sticking them on the letterhead of accounting firm KPMG Peat Marwick, according to the complaint filed last Friday by Comey. He also inflated the value of his Friedlander International Ltd. to pump up his management fees, and manipulated the price of warrants on eNote.com Inc., a now defunct Williston, Vt., company, Comey's complaint said.
The three counts of securities fraud come two years after Friedlander's first bout of legal trouble, which spawned a civil complaint charging fraud and stock manipulation from the SEC. That remains unresolved, though a court-appointed receiver is sitting on $12 million in assets frozen by the SEC in 2001. Between 25 and 35 named buyers, representing an unknown number of investors, were allegedly defrauded by Friedlander. The agency's amended complaint expanded on the range of the money manager's alleged misdeeds, a move Kathleen Ford, the agency's assistant chief litigation counsel, said was timed to coincide with the federal criminal charges.
Ford said a hearing on the disposition of the funds held in receivership is scheduled for early January. She also said Friedlander declared personal bankruptcy in Florida in 2002, and that the agency plans to fight the money manager and prevent him from benefiting from the state's forgiving personal bankruptcy laws.
Friedlander did not return a telephone call seeking comment, and his lawyer, William Pinzler, declined to discuss the case.
Friedlander, whose Friedlander Capital Management Corp. and Friedlander Management Ltd. managed three hedge funds, allegedly filed false reports on the value of a pooled investment fund and tried to inflate the value of his hedge funds through a portfolio-pumping scheme.
Investors in the hedge funds Friedlander International Ltd., Friedlander L.P. and the Opal International fund were lied to since 1996 about the value of the funds, according to the criminal complaint filed on Friday.
"Although Friedlander consistently represented to investors and prospective investors that the pooled fund had positive returns and several million dollars in assets, in reality, the Pooled Fund had few assets other than the cash deposited by new investors and was rapidly declining in value," Comey's complaint said.
Friedlander claimed the pooled fund had about $30 million at a time when it had only $6 million, the complaint said. In 1994, Friedlander hired KPMG Peat Marwick to provide a "compilation report" to pooled fund investors in lieu of an annual report. A compilation report is an unaudited statement from a public accounting firm that details the investor's gains and losses for portfolio monitoring and tax purposes.
From then on, the complaint alleges, Friedlander filed bogus compilation reports using KPMG letterhead, using the same format and similar wording, until his funds were frozen by the SEC in 2001. In early 2001, he told investors the pooled fund had $5.74 million at the end of 2000, while its actual assets were only $245,000.
He also paid one of his management entities $2.4 million fees from investor money, fees that were inflated because he had overstated the net asset value of his Friedlander International Ltd. hedge fund, the complaint said.
In 1999, Friedlander made a $5 million investment in eNote.com, a company that was trying to develop the technology to send email through television sets. Friedlander's funds then owned 5 million preferred shares and a warrant for 2 million more shares at $1 each, valid through April 2004.
As the company's stock price careened from $9.37 a share in April 1999 to its August 2000 price of $3 a share, Friedlander allegedly funneled $1.58 million to the company through his other management entities, making 11 loans between $50,000 and $250,000.
eNote Chief Executive John Varsames resigned in August 2000, and by the end of the year the stock price had dropped to 38 cents on the OTC board. The company closed in 2002 after working with a skeleton staff for several months.
At this time, Friedlander claimed the warrants were worth $4 million, while an eNotes SEC filing valued them at $325,000, the complaint said.