Nearly 20 years after he lost millions of dollars investing money from public-worker pension funds in Pennsylvania and New England, investor Michael A. Liberty is fighting an attempt by the Securities and Exchange Commission to recover some of the cash.
The SEC asked a judge in federal court in Philadelphia in September to order Liberty to pay $5.4 million, plus interest and penalties, because his earlier claims that he didn't have the money "were materially fraudulent, misleading, inaccurate and incomplete, in that Liberty had access to tens of millions of dollars which he concealed," the SEC says, citing old Liberty emails and new testimony from a former Liberty accountant.
On Monday, in a response filed in federal court in Philadelphia, Liberty's lawyers said he should not have to pay because the SEC is trying to use late and "irrelevant" evidence.
In 2006, the SEC sued Liberty and three officers of the Philadelphia-based Keystone venture-capital funds, alleging that Keystone, starting in 1997, had let Liberty invest $27 million - mostly from the underfunded Philadelphia Board of City Pensions and Retirement, the Pennsylvania State Employees' Retirement System, and the Connecticut pension plan - in small businesses, many of them unapproved by the investors, some of them controlled by Liberty.
Of the $27 million, "$18 million was apparently entirely lost when the businesses in which the fund invested, at Liberty's direction and without proper approval, failed," according to the SEC. The rest was "diverted," it said: $4.5 million "directly went to Liberty for his personal benefit"; the rest "went to other third parties, often connected to Liberty."
Three Keystone principals paid penalties to the SEC, and the firm never raised another fund, vanishing from the area's modest venture scene.
In June 2010, Liberty and the SEC agreed to settle the charges against him, without a finding of wrongdoing, if Liberty paid $5.96 million in "disgorged" profits and interest.
But, "based on his sworn representations in his financial declaration" and supporting documents showing that Liberty, in mid-2009, "had an estimated net worth of negative $29 million," the court agreed to let Liberty pay just $600,000 - with the condition that if his financial statements were later found to be "fraudulent, misleading, inaccurate or incomplete" the SEC could petition the court to make Liberty pay the rest.
And that's what the SEC did, on Sept. 28. In its 13-page supporting memo, the SEC cited evidence from "subsequent litigation involving Liberty," including emails that "reveal that while Liberty was pleading hardship and insolvency" - after he had signed his financial statements but before the SEC deal was final - Liberty was also telling investors that his own shares of a new company he had set up, the digital-wallet developer Mozido LLC, had a "book value" of $127 million, with "zero debt."
Mozido, based in Texas, has raised more than $250 million from investors including Wellington Management Co.; MasterCard; and the hedge-fund guru Julian H. Robertson Jr. of Tiger Management. (Update Feb. 2017: More on Wellington, Mozido, and their Arab and African partners in developing-world mobile tech here.)
Mozido's executive chairman is Robert Turner, who recently reorganized his firm, Turner Investments of Berwyn, after most of its former $30 billion in client assets and many of its stock-pickers departed after the recession. Another investor is Richard Vague, the Philadelphia consumer-marketing entrepreneur and philanthropist.
Citing SEC testimony by James G. Stanley, a longtime former Liberty business associate, the SEC also detailed Liberty's use of limited-liability companies as "personal checking accounts" and to "shelter his assets from creditors."
In particular, the SEC noted payments through two bank accounts and a credit card at Bank of America for Liberty-controlled Xanadu Partners LLC, which "spent or disbursed nearly $27 million" from late 2007 through late 2010 - a period in which the SEC says Liberty reported he had "net negative worth" - but failed to report its assets to the SEC as required under the settlement.
The payments included suites at the Beverly Hills Hotel and other five-star locations, more than "$25,000 paid to Mercedes-Benz," and "tens of thousands of dollars on restaurants" - in sum, "a lifestyle bearing no resemblance to the financial straits Liberty claimed to be in," according to the SEC.
Besides asking for the money and penalties, the SEC wants the court to force Liberty to provide more detailed accounting for his spending since 2010.
In Liberty's response, his lawyers wrote that Liberty had made the SEC well-aware that he spent $2 million a year maintaining his lifestyle and that he "frequently borrowed from friends and other sources" to cover loans he owed.
Liberty did not report any income or assets for Xanadu, and the SEC didn't ask for any, his filing adds.
"Liberty did not mislead the court or the [SEC] about his financial condition at the time of the settlement," according to the response. The SEC's "irrelevant, incorrect, untimely, and incomplete materials," it adds, "do not support a claim of fraud."
Liberty's assets in fall 2009 or later, when he was raising money for Mozido, were not relevant to his statement to the SEC as of June 2009, his lawyers wrote: "Actions taken after individuals submitted their financial disclosures are irrelevant" as a cause for reopening the case.
Indeed, they wrote, "Mr. Liberty could have won the lottery on July 17, 2009, and this influx of cash would not have altered his financial condition" when his asset report was signed earlier.
Liberty also questions the actual value of Mozido shares in 2009 and 2010, because it was losing money: "The book value is not the market value." Mozido remains private and is still trying to raise capital.