The Securities and Exchange Commission alleged in a complaint filed in federal court in Los Angeles Tuesday that Stuart Frost and Frost Management Company, an investment advisor to five private venture capital funds, defrauded the funds and their investors of over $14 million by charging undisclosed and excessive incubator fees to start-up companies in which the funds invested. The SEC claims they violated their fiduciary duties.
From 2012 to 2016, Frost allegedly raised nearly $63 million for the funds, mostly from high net worth individuals and trusts. The funds were invested in a series of start-up companies using the so-called “Frost incubator model,” whereby a Frost-owned company, Frost Data Capital purportedly provided operational and other support to help the companies grow, with the endgame being a sale to another company, in exchange for fees paid to it by the start-ups.
The SEC said that in reality, the fees were absconded to pay for Frost Data Capital’s overhead and to foot the bill for Frost’s lavish lifestyle. When Frost needed more cash, he would allegedly create new start-ups, fund them with investor money, and extract more incubator fees.
Frost solicited investors via the Internet and at in-person and group presentations, the SEC claims. He touted a no-fee, no-carry opportunity to invest in “big data analytics,” with exits projected from two to five years for each start-up via acquisition by a “major player” in the computer industry.
Frost allegedly told investors that he would come up with ideas or identify the needs of big data companies and pass them through Frost Data Capital, which would write up a business plan and pass it on to a portfolio company, which would then develop software that would be produced by the companies.
In reality, the SEC said, Frost was charging the companies millions in excessive and undisclosed fees to support his lavish lifestyle, which included a personal chef and housekeeper, an archery range, beach club membership, a boat and luxury cars.