In 2019, the U.S. Securities and Exchange Commission (SEC) alleged that an investment adviser defrauded investors in a family of private venture capital funds of more than US$14 million. Now, it has settled the case with only a US$150,000 penalty.
The SEC announced that the U.S. district court for the central district of California entered a final judgement to resolve its case against Stuart Frost — owner of now-defunct advisory firm Frost Management Co. LLC — that the regulator had accused of defrauding fund investors.
In its complaint, filed in 2019, the regulator alleged that, between 2012 through 2016, Frost breached his fiduciary duties and defrauded five private venture capital funds, and the investors in those funds, by charging excessive, undisclosed fees to start-up companies that the funds invested in.
According to the SEC, Frost raised nearly US$63 million from investors for the funds, which invested in a portfolio of startups that were also provided with operational support from another company owned by Frost. Frost Data Capital’s services were meant to help grow the companies to the point that they could be sold.
In return for those support services, the companies paid Frost Data so-called “incubator fees.”
The SEC alleged that those fees were excessive and weren’t disclosed to investors, and that funds and investors were defrauded out of US$14 million as a result. It also alleged that the lack of disclosure represented a breach of Frost’s fiduciary duties to the funds.
Last year, the district court found that Frost admitted to negligent violations of the investment adviser rules, and it granted the SEC a permanent injunction against him to prevent future violations.
Now, the court has entered a final judgment on consent, which includes the permanent injunction against Frost that enjoins him from future violations and orders him to pay a US$150,000 civil penalty.
In its order settling the case, the SEC said it is “appropriate and in the public interest to impose the sanctions agreed to” in a settlement offer from Frost.