Investors Say Supply Sider Arthur Laffer Backed a Ponzi
HOUSTON (CN) - Fifty-two investors claim fund managers associated with supply-side economist Arthur Laffer took $3.1 million to prop up a Ponzi scheme, then said nothing as their money was "wasted with no reasonable expectation of recovery."
Lead plaintiffs Ronald and Lavonne Ellisor sued David Wallace, Costa Bajjali, and their entities Wallace Bajjali Development Partners LP, Wallace Bajjali Investment Fund II LP, the Laffer Frishberg Wallace Economic Opportunity Fund LP, and Arthur Laffer in Harris County Court.
Laffer is best known for the Laffer Curve, an economic theory that says reducing taxes will increase government revenue. He was a member of President Reagan's Economic Policy Advisory Board during the 1980s.
Laffer now is chairman of Laffer Associates in Nashville, Tenn., an economic research and consulting firm.
A Laffer Associates employee told Courthouse News in a telephone interview today that Laffer has severed ties with the Laffer Frishberg Wallace Economic Opportunity Fund.
"He was affiliated with them at one time, but he's not anymore," the employee said.
The plaintiffs in Harris County say Wallace and Bajjali began soliciting them to invest in their limited partnerships in 2006.
"Mr. Laffer lent his name to Wallace and Bajjali for a fee to increase the credibility of their offerings, and effectively vouched for the credibility of the limited partnerships," the complaint states.
It continues: "The limited partnerships are investment vehicles run by defendants Wallace and Bajjali, with endorsement and participation from Laffer. They started out primarily in real estate investments, and solicited investors for their various real estate investments. In September 2006, WBIF II made its first investment in Business Radio Network, LP ('BizRadio') in the form of advancing convertible promissory notes. By December 31, 2006, WBIF had advanced to BizRadio $1,493,170.00, and by June 30, 2007 the invested balance in BizRadio was up to $3,157,170.00. LFWEOF [Laffer Frishberg Wallace Economic Opportunity Fund] has contributed significantly more than that. At that time, BizRadio was looking to purchase radio stations in both Houston and Dallas/Fort worth at an estimated cost of $12,000,000.00.
"These investments in BizRadio arose from the close relationship between defendants Wallace and Bajjali, and the principals in BizRadio, Daniel Frishberg and Albert Kaleta. Frishberg and Kaleta were investment counselors, and Frishberg was an on-air personality in the business talk radio circuit.
"The BizRadio business was a Ponzi scheme constructed with the support of defendants. BizRadio never generated sufficient revenue through the sale of airtime to keep itself a viable entity. BizRadio was able to exist through the continuous influx of additional capital until it eventually collapsed in upon itself.
"Defendants were the primary source of BizRadio's funds. Early on, defendants were aware that BizRadio was unable to support itself and was a Ponzi scheme. In the Wallace Bajjali Investment Fund II, LP, June 30, 2007 Investor Report it says 'until such time as a significant, equity partner is identified, WBIF II will supplement BizRadio's cash flow to cover monthly operating expenses.'
"No such 'significant, equity partner' was ever identified. Rather, the same group of individuals who had invested in other Wallace Bajjali investments, or who had other investments with Frishberg or Kaleta were repeatedly solicited for additional investments with returns which defendants knew were not possible except through a pyramid scheme.
"Defendants continued to provide funding to BizRadio to the detriment of the investors for whom they served as agent, and to whom they owed a fiduciary duty long after they were aware that the promised returns were false and that BizRadio was perpetrating a fraud on the investors. Each of the plaintiffs in this case was one of those investors," according to the complaint.
The SEC sued BizRadio co-founder Albert Kaleta and his investment firm Kaleta Capital Management in November 2009, claiming he sold $10 million in promissory notes by saying the money would be loaned to small businesses at up to 14 percent interest, then funneled the money to BizRadio's scam.
Kaleta signed an SEC consent order in which he agreed to pay a $1.5 million fine, admitted no wrongdoing, and agreed not to violate securities laws in the future, according to a contemporary report in the Houston Chronicle.
"A receiver was appointed and the receivership was expanded to include BizRadio and Frishberg's investment fund, DFFS," the new complaint states. "The SEC filed additional enforcement actions including SEC v David Gordon Wallace Jr. and Costa Bajjali," in Houston Federal Court. "The basis of this action was 'funds fraudulently obtained by KCM from investors, and other tort claims related to the business dealings between certain Wallace Bajjali Parties' and Frishberg and Kaleta. KCM was not the only entity fraudulently obtaining funds from investors, WBDP and WBIF II and LFWEOF were part of the same effort."
Frishberg formerly broadcast as the radio personality "The Money Man." He settled with the SEC by agreeing to pay a $65,000 fine, and the SEC barred him from associating with any broker, securities dealer or investment adviser, according to contemporary reports.
The plaintiffs seek damages from Wallace, Bajjali, Laffer and their partnerships, alleging negligence, negligent misrepresentation, breach of fiduciary duty, statutory fraud, common law fraud, conspiracy and violations of the Texas Securities Act.
They are represented by Thomas Schmidt of Houston.