A Buffalo, Minn., investment adviser, David Blaine Welliver, and his company, Dblaine Capital, have been charged with fraud, breaches of fiduciary duties, and numerous other violations of the federal securities laws by the U.S. Securities and Exchange Commission.
In a complaint filed in Minnesota federal district court (PDF), the SEC charges that Welliver and his company “entered into an improper quid pro quo agreement” by taking out about $4 million in loans from a Burnsville company on condition that a portion of the loan be reinvested in a company controlled by principals at the lender. That agreement was not revealed to investors in a mutual fund managed by Welliver, or to the fund’s trustees, according to the complaint.
The SEC charged that Welliver, 51, spent at least $500,000 of the $4 million for his personal benefit, including a $40,000 car, “vacations, meals, home improvements, high-end department store purchases, jewelry, his son’s college tuition, and the payment of back taxes.”
Welliver’s attorney, James Masella, of the New York law firm Blank Rome, denied the charges, saying: “We fully expect to clear Mr. Welliver’s good name. The SEC’s claims are utterly baseless. We fully anticipate a jury of Mr. Welliver’s peers will vindicate him completely.”
The saga began early last year, the SEC said, when Welliver sought to merge with another mutual fund company to increase total assets under management and thereby collect more management fees. Welliver’s firm reportedly had less than $10,000 in liquid assets at the time, well below the $200,000 needed to consummate the merger.
According to the SEC, last October Welliver entered into a financing agreement with Lazy Deuce Capital Co., LLC, of Burnsville, to obtain financing. In exchange, Welliver allegedly agree to invest a portion of the loan proceeds in a partnership, Semita Partners, LLC, set up at the time and controlled by several Lazy Deuce principals.
“By accepting the loans, Dblaine Capital was being compensated for allowing Lazy Deuce to choose the Fund’s investments, regardless of whether Lazy Deuce’s chosen investments were in the best interest of the Fund’s shareholders,” the complaint asserts.
The SEC said that Welliver did not inform his investors or the fund’s trustees of the financing arrangement. Over the course of the next several months, Welliver’s company borrowed about $4 million from Lazy Deuce, executing 27 promissory notes, with interest rate ranging from 15 to 18 percent, it said.
The arrangement began to unravel when Dblaine Capital’s mutual fund investors cashed out their investments “en masse” following the merger, the SEC said. That forced Welliver to liquidate his large-cap stock holdings, pushing the Semita investment beyond the fund’s stated guidelines for having no more than 15 percent in illiquid securities and no more than 5 percent in any one security.
In June, a principal at Lazy Deuce allegedly informed the chief compliance officer of the Fund and Dblaine Capital that the Semita shares, which represented all but $3,000 of the fund’s assets at the time, were worthless. It wasn’t until July 18, though, that Welliver and the fund trustees informed investors and wrote down the Semita investment, the SEC complaint said. The fund was liquidated on Aug. 11.
Calls to Lazy Deuce were not returned. Semita, which shares the same Burnsville address as Lazy Deuce, could not be reached.
The SEC complaint asks for a jury trial and is seeking to recoup “ill gotten gains” as well as unspecified civil penalties.