Million-dollar dogfight over online pet-food retailer

William B. Fretz Jr. and John P. Freeman thought they had hit a low point in 2009, when one of their biggest clients - and one of the state's premier power brokers - was convicted of corruption.

As former State Sen. Vincent J. Fumo headed to prison, their Montgomery County hedge fund, Covenant Partners, sagged under the weight of the recession and federal investigations.

But the two were never charged, and Covenant carried on with the type of high-risk, high-reward investments that had made them millions.

The major bright spot on their horizon was being a primary shareholder in Pet360, an online pet-food retailer that clung like a barnacle to its corner of the market, even after the dot-com bubble had pushed competitors such as Pets.com into oblivion.

After limping along, their hedge fund finally tanked last year - at the hands of a friend who, they say, schemed to get their shares and quickly sell them for millions in profit. The friend, Peter Frorer, counters that Fretz's undoing was his failure to repay debts.

Now the men are entangled in a bitter legal battle, their falling-out exposed in mountains of documents, being weighed by multiple judges and watched by federal and state investigators.

Beyond being a curious footnote to the Fumo case, their dispute offers a glimpse into the local world of high-stakes investing, where promises sometimes last only as long as the money does.

"These people are shameless liars," Frorer said of Fretz and Freeman. They say the same of him.

Frorer, 54, grew up in the leafy Philadelphia suburb of Swarthmore and settled in Bryn Mawr. His middle name is Harvard, but he went to Princeton. Fretz, 50, attended Utica College in New York and returned home, to the rural northern end of Montgomery County.

They met in their late 20s, working at a finance firm in West Conshohocken. After founding their own hedge funds, the two continued to trade business, and around 2009 began major land deals in Costa Rica.

They spent a lot of time at their 5,000-square-foot bachelor pad in Playa Manuel Antonio, which Frorer now rents to travelers for $8,000 a week.

In 2011, when Covenant was struggling to pay its lawyers and stave off millions of dollars in judgments, Frorer lent the firm and its two principals $800,000.

They quickly defaulted.

The debt ballooned to more than $1.2 million and 25 percent interest, according to the loan documents. Frorer's frustration grew, particularly as he learned about Fretz's other unpaid debts.

"As you know, I have every right to rip your eye balls out and evidently sue you for the Petfood shares," he wrote in a December 2012 e-mail to Fretz, one of dozens filed in their court cases.

In October 2013, after he had transferred 5 million of Covenant's Pet360 shares to Frorer as collateral, Fretz tried to reassure him: "I believe I have many creative and smart ideas as well and I am sure we will work this out."

By then, Frorer's faith in Fretz had run out. In April 2014, he called Pet360 CEO Brock Weatherup and asked if it was possible to put the Covenant shares he was holding out of reach:

"What I want to do is . . . sell it to a Costa Rican who is then going to, you know, between us girls, put it into a trust for my wife and me," Frorer said in a voicemail to Weatherup that the SEC later subpoenaed.

Around the same time, Frorer began buying some of the judgments lodged against Fretz and Covenant - including the $2.5 million owed to Fumo's former charity, Citizens Alliance.

In 2002, Fretz had taken $9 million of Citizens Alliance's money with instructions from Fumo to invest it in "companies that Fretz was very close to or in which he was personally involved," state prosecutors said.

Fretz and Freeman were never charged with a crime. But the Financial Industry Regulatory Authority later excoriated their habit of mingling personal money with the fund's money and revoked their licenses. They are appealing that order and deny wrongdoing.

In 2011, the state Attorney General's Office sued Covenant to get back $2.5 million for Citizens Alliance. Several due dates passed, but Covenant never paid.

So last spring, Frorer approached the Attorney General's Office to take over the debt. The prosecutor and the nonprofit, which had changed its name to the Passyunk Avenue Revitalization Corp., accepted the offer.

"It just didn't make sense to continue pursuing it," said Paul Levy, chairman of the renamed nonprofit. "This money . . . we could spend years and millions of legal dollars chasing it."

Frorer gave the charity $400,000 and agreed to evenly split the proceeds, minus attorney's fees, when he collected the remainder from Covenant. Then he used the $2.5 million judgment to garnishee Covenant's remaining 2.7 million shares in Pet360.

The day after the Attorney General's Office signed the deal, Pet360 announced a sale to PetSmart - for up to $160 million.

The stock Frorer got for 20 cents a share suddenly was worth five times as much.

Covenant declared bankruptcy in hopes of halting the garnishment of its Pet360 proceeds. Freeman had been an original investor and sat on its board of directors.

In a lawsuit, the bankruptcy trustee claims Frorer took the shares fraudulently and knew all along that Covenant was broke and Pet360 was about to sell. The trustee also blames Fretz and Freeman for breaching their fiduciary duty by giving the fund's 5 million shares to Frorer.

In court filings, Frorer counters that Fretz and Freeman handed over the shares willingly. "They were all savvy, financial sophisticates who at all times knew and understood what they were doing," his attorney, Alan S. Fellheimer, wrote.

In Delaware, a separate lawsuit by Pet360's common shareholders frames Frorer as part of a larger scheme to rush through an underpriced, poorly disclosed sale of the company. Their lawyer, Sidney Liebesman, described it as "a Faustian deal" between Frorer and the CEO.

"Weatherup would help him steal the 8 million shares," he told Judge J. Travis Laster in a hearing last month, "and in exchange, the company, the board, especially Brock Weatherup, got something very important" - Frorer's vote to push Freeman off the board and approve a sale that reaped them millions.

Laster said at the hearing, "This case already has a smell to it," and he ordered Pet360's former attorneys to hand over all communications between Frorer and Weatherup.

Freeman, a Pet360 investor for nearly two decades, said it was painful to be pushed out so close to the finish line.

"I gave my heart and soul, blood sweat, and tears, put myself in harm's way to make sure Pet360 succeeded," he told The Inquirer this month. He believes it was worth at least twice what PetSmart paid.

The company started out as a family-run direct-marketing firm in Plymouth Meeting, and now reaches about 12 million pet owners monthly through PetFoodDirect.com, PetMD.com, BlogPaws, and other sites. (Pet360 also provides content for Philly.com, the online partner of The Inquirer.) The acquisition expanded PetSmart's online reach, and a month later, PetSmart was bought for $8.7 billion - the biggest private-equity deal of 2014.

Weatherup, who declined to comment for this article because of the ongoing litigation, told the Philadelphia Business Journal in March that Pet360's acquisition was a fair deal, but, "You always want more."

In an interview Thursday, Frorer denied having inside knowledge of the sale and said that even though it increased his investment's value, it was "the worst thing that could've happened.

"If it hadn't been sold, I wouldn't be being sued right now," he said.

In the April 2014 voicemail to Weatherup, Frorer seemed to foresee the coming legal morass.

"I don't want to be dragged in front of a judge . . . having [Fretz's attorney] pontificate about how I only lent $800,000 and how is it that I've now walked away with shares worth $7 million," he said then.

Even if the cases go in their favor, Fretz and Freeman are unlikely to get much money back.

In a consent decree to close a four-year SEC investigation, Fretz and Freeman have tentatively agreed to relinquish $5.9 million in earnings and be banned from the securities industry, according to a source close to the negotiations.

The agreement would not require Fretz and Freeman to admit guilt in their operation of Covenant, the source said. But it would prohibit them from claiming innocence.

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