Investment manager pleased clients — until his criminal past emerged
After she retired as a legal assistant, Patricia Hank took her financial planner’s advice and invested her $300,000 retirement savings with Sherman Oaks investment manager Bruce Fred Friedman.
It was an easy decision, she said. Friedman invested in income-producing real estate, had a long list of satisfied clients and was widely known for his charitable contributions.
“I thought he was a pillar of the community,” Hank said. “He was an upstanding guy who knew about property and how to buy and invest.”
Then in December 2008, she and other clients received an unexpected letter from Friedman. The man holding her life savings, Hank learned, had once spent two years in prison for grand theft, and later declared personal bankruptcy. Friedman also told clients he was charged with wire fraud, although the charge was later dropped.
Not long after Hank received the letter, the Securities and Exchange Commission filed civil charges against Friedman in U.S. District Court in Los Angeles, accusing him of running a Ponzi scheme estimated at more than $200 million.
Friedman, 60, has denied allegations that he was running a Ponzi scheme, but he did consent to the appointment of a receiver to liquidate his assets and disburse the proceeds to investors. More than a year into the process, investors who lost money are still asking questions: How could someone with a felony conviction for grand theft become a private fund manager? And if the SEC says he stole millions of dollars, investors wonder, why isn’t there a criminal case as well?
“How Bruce isn’t in jail is beyond me,” said Dennis Lawton, a Los Angeles insurance broker who said he worked with salesmen who steered millions of dollars in business to Friedman. “He ruined a lot of people, and he set us all up.”
After a hearing on the complaint last year, an SEC attorney met with investors outside the courtroom and told them the FBI and U.S. attorney’s office were conducting a criminal investigation. Both agencies declined to comment.
Regulators, investor advocates and legal experts say the Friedman case points to a gap in the oversight of those who run private investment funds. They say that no law specifically prohibits someone with a criminal background from getting into this business, and that federal regulators don’t have the resources to adequately police an industry that handles trillions of dollars.
“It’s pretty much buyer beware,” said Denise Voigt Crawford, the Texas state securities commissioner and president of the North American Securities Administrators Assn. “Investors are left to their own devices to do research and find out if the deal is legitimate. That is fraught with danger.”
What’s more, the National Securities Markets Improvement Act approved by Congress in 1996 made it harder for states to step into the regulatory breach, according to Jennifer J. Johnson, a professor at Lewis & Clark Law School in Portland, Ore.
“There’s no supervision. The federal government is not watching the henhouse, and Congress has prohibited the states from even peeking inside,” Johnson said.
Federal law does require private fund managers to disclose relevant information about their backgrounds to investors. The SEC complaint said Friedman committed fraud by not disclosing his background to investors at the outset.
According to the SEC, Friedman sent the letter — dated Dec. 16, 2008 — after coming under regulatory scrutiny. In the letter, Friedman acknowledged that he spent two years in prison in the 1980s after being convicted of grand theft. He also said he had declared personal bankruptcy in 1993. Court records show that Friedman’s conviction was related to the theft of $300,000 from his employer, Avery Dennison Corp., where he worked as a tax manager.
“I have no excuse for my behavior and I deeply regret my actions,” Friedman told investors.
Hank said she was stunned by the letter, saying she had been pleased with her monthly returns.
“That’s when I started worrying,” said Hank, who lives in Calabasas. “I was kind of panicked from that moment to the day I found out there was no money.”
The SEC complaint, filed March 4, 2009, said Friedman launched Diversified Lending Group in 2004, recruiting insurance agents and other salespeople to sell stakes in his investment fund.
According to the complaint, the fund promised to invest money in distressed, or “scratch and dent,” real estate, as well as in mortgage loans. Investors were promised returns of 9% or 12%, the SEC said.
Millions of dollars were diverted to “finance his extravagant lifestyle,” including a $6.5-million home in Malibu, according to the SEC complaint.
Days after the complaint was filed, U.S. District Judge Manuel L. Real froze Friedman’s assets and appointed receiver David A. Gill to try to recover money for investors.
In a recent report, Gill said Friedman diverted $57million of investor money for himself and others. Friedman spent $16.8 million on real estate for himself, friends and family, and $8.9million on private jet travel, the report said.
He also bought a fleet of luxury cars for $1.4 million, including a $250,000 Bentley, the receiver said in a March 25 report.
Gill’s report noted that some of the money went to legitimate investments including apartment buildings, a business park in San Diego County and start-up ventures such as Kidfresh, a company that sells healthful children’s meals.
But he concluded that Diversified Lending Group “was a classic Ponzi scheme, where earlier investors were paid fictitious returns with the funds generated from new investors.”
Friedman, who lives in Woodland Hills, declined to be interviewed for this article. But he defended himself in written responses filed in federal court.
“I strongly disagree with the receiver’s statement that DLG was a Ponzi scheme,” Friedman said in an April 6 filing. “The receiver’s own report reflects that $129.8 million of the funds received by DLG was invested in real estate and other investments. I remain confident that some of these assets have the potential to generate substantial returns.”
Friedman also defended his use of private aircraft, saying it was “used primarily to find additional investments for the company, as some days I had to be in two or even three states on the same day.” He acknowledged giving hundreds of thousands of dollars of investors’ money to his children, but said “they were valid gifts and are includable in my income.”
Friedman also gave generously to charities — nearly $5 million, by Gill’s reckoning. One of his favored charities was the Dodgers Dream Foundation, which the baseball team founded to benefit underprivileged youth.
On March 29, 2008, the Dodgers invited Friedman to throw the first pitch at an exhibition game against the Boston Red Sox at Los Angeles Memorial Coliseum to mark the 50th anniversary of the Dodgers’ move from Brooklyn to L.A.
After the SEC filed its complaint, a Dodgers spokesman said the team hoped the allegations were unfounded. The team declined to comment further.
Lawton, the insurance broker, said he first met Friedman in 2007 at a seminar at the Valley Inn restaurant in Sherman Oaks, where Friedman was recruiting sales agents.
“He had it nailed. He was very convincing,” Lawton said of Friedman. “He had us all going. We genuinely believed he was doing what he said.”
Friedman was a charmer, according to one of his former employees, Bertha Roman. Roman said she was working as a receptionist for a landscaping company in 2003 when she ended up on the telephone with Friedman.
“I can hear your smile through the phone,” Friedman said, according to Roman. “I need someone like you at my company. Whatever they’re paying you, I’ll pay you more.”
Within a few weeks she was part of his staff of about 16 employees working out of handsome offices on Ventura Boulevard in Sherman Oaks.
Roman said that whenever an employee had a birthday, Friedman took the entire staff out to lunch to celebrate. “We could order whatever we wanted,” Roman said, “and he would pay.”
After Friedman sent his letter to clients, Barry Nevins said, he called Diversified Lending Group in hopes of getting his mother-in-law’s $50,000 investment returned.
“They said they had to sell some properties and cars in order to get the money. Cars? I said, ‘What? This isn’t a real company,’ ” said Nevins, of Franklin, Mass. “She never got a penny back.”
Gill has filed lawsuits against Friedman, his family and friends to recover assets he said were looted from investors. Friedman’s brother, Mark, has agreed to repay $6million in installments over the next six years, according to the receiver’s report.
The receiver has also sued brokers, including Lawton, to recover commissions they got from Friedman. Gill said in a lawsuit that Lawton got $1.5 million from Friedman. Lawton declined to comment on that suit.
Investors hope Gill can recover their losses but say they might receive only pennies on the dollar.
“That was my life savings. I didn’t really have anything else,” said Hank, 63. “We had a lot of plans. They’re gone now.... It’s a sad thing.”
