2026-03-24 sec-litreleases complaint 407 KB 39,083 chars

SEC v. STUART FROST; and FROST MANAGEMENT COMPANY, LLC, No. 8:19-cv-01559-SPG, Central District of California (Mar. 24, 2026) — Complaint

raw: 209(e)(1) and 214 of the Investment Advisers Act of 1940 (“Advisers Act”) [15

209(e)(1) and 214 of the Investment Advisers Act of 1940 (“Advisers Act”) [15, No. 8:19-cv-01559-SPG (Mar. 24, 2026)

Caption: Securities and Exchange Commission v. Stuart Frost and Frost Management Company, LLC

Enriched metadata

Scheme: investment-adviser-fraud (100%)
Court: Central District of California
Case No.: 8:19-cv-01559-SPG
Victim loss: $41,189,521
Entity: FROST MANAGEMENT COMPANY, LLC

Classified investment-adviser-fraud(confidence 100%). EDGAR detection: forms ADV/ADV-E/ADV-W/Form D· recall 33% / precision 13%. detection rule →

Extracted insights

Dollar amounts 19

$63.00M $63 million $10M–$100M
$49.90M $49.9 million $10M–$100M
$41.19M $41,189,521 $10M–$100M
$21.69M $21.69 million $10M–$100M
$14.00M $14 million $10M–$100M
$13.44M $13,440,000 $10M–$100M
$7.57M $7,570,000 $1M–$10M
$5.25M $5,250,000 $1M–$10M
$3.40M $3.4 million $1M–$10M
$1.70M $1.7 million $1M–$10M
$867K $867,000 $100K–$1M
$637K $636,798 $100K–$1M

Entities 9

person Alka Patel
person amy j. longo
person donald w. searles
organization Frost Data Capital
organization Frost Management Company, LLC
person Janet Moser
person Michele Wein Layne
organization Securities and Exchange Commission
person Stuart Frost

Triples 8

Frost Management Company, LLC Defrauded The Funds And Their Investors Of Over $14 Million
Defendants Raised Nearly $63 Million For The Funds
Frost Data Capital Provided Operational Support And Other Services
Portfolio Companies Paid Incubator Fees To FDC
Incubator Fees Were Used To Cover FDC’s Overhead
Frost Created New Portfolio Companies
FDC Extracted Even More Incubator Fees
Frost And FMC Failed To Disclose The Existence Or Amount Of Incubator Fees

PDF

209(e)(1) and 214 of the Investment Advisers Act of 1940 (“Advisers Act”) [15 · Source

Text layers

Extracted body text (39,083c)

COMPLAINT 1

DONALD W. SEARLES (Cal. Bar No. 135705)
Email: [email protected]
JANET MOSER (Cal. Bar No. 199171)
Email: [email protected]

Attorneys for Plaintiff
Securities and Exchange Commission
Michele Wein Layne, Regional Director
Alka Patel, Associate Regional Director
Amy J. Longo, Regional Trial Counsel
444 S. Flower Street, Suite 900
Los Angeles, California 90071
Telephone: (323) 965-3998
Facsimile: (213) 443-1904

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

vs.

STUART FROST and FROST
MANAGEMENT COMPANY, LLC,

Defendants.

Case No.

COMPLAINT

Plaintiff Securities and Exchange Commission (“SEC”) alleges:

JURISDICTION AND VENUE

1. The Court has jurisdiction over this action pursuant to Sections 209(d),

209(e)(1) and 214 of the Investment Advisers Act of 1940 (“Advisers Act”) [15

U.S.C. §§ 80b-9(d), 80b-9(e)(1) & 90b-14].

2. Defendants have, directly or indirectly, made use of the means or

instrumentalities of interstate commerce, of the mails, or of the facilities of a national

securities exchange in connection with the transactions, acts, practices and courses of

COMPLAINT 2

business alleged in this complaint.

3. Venue is proper in this district pursuant to Section 214 of the Advisers

Act [15 U.S.C. § 90b-14] because certain of the transactions, acts, practices and

courses of conduct constituting violations of the federal securities laws occurred

within this district. In addition, venue is proper in this district because Defendant

Stuart Frost resides in this district and Defendant Frost Management Company, LLC

has its principal place of business in this district.

SUMMARY

4. From 2012 through 2016, Frost Management Company, LLC (“FMC”),

an investment adviser to five private venture capital funds, and its sole owner, Stuart

Frost (“Frost”), 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, in violation of their fiduciary duties as investment advisers.

5. During that five-year period, Defendants raised nearly $63 million for

the funds, mostly from high net worth individuals and trusts. The funds were invested

in a portfolio of start-up companies (“portfolio companies”), using the so-called “Frost

incubator model,” in which a Frost-owned company, Frost Data Capital (“FDC”),

purportedly provided operational support and other services to help “incubate” the

portfolio companies in anticipation of those companies maturing and ultimately being

sold or acquired by another company. In return for those support services, the

portfolio companies paid incubator fees to FDC.

6. In reality, a significant portion of the incubator fees charged to the

portfolio companies was used to cover FDC’s overhead and to pay Frost’s exorbitant

salary and extravagant personal expenses.

7. When Frost needed more cash to fund his lavish lifestyle, he created new

portfolio companies and, after investing more fund capital into the new companies,

FDC then extracted even more incubator fees.

8. At the same time, Frost and FMC failed to disclose to the funds either

COMPLAINT 3

the existence of or the actual amount of incubator fees being paid by the portfolio

companies, and also charged the funds undisclosed and improper management fees.

9. By engaging in this conduct, Defendants have violated the antifraud

provisions of Sections 206(1)-(2) and 206(4) of the Advisers Act [15 U.S.C. §§ 80b-

6(1),(2) and (4)], and Rule 206(4)-8(a)(1)-(2) thereunder [17 C.F.R. § 275.206(4)-8].

10. The SEC seeks permanent injunctions, disgorgement with prejudgment

interest on a joint and several basis, and civil penalties against Defendants.

THE DEFENDANTS

11. Defendant Stuart Frost, age 57 and a resident of Laguna Niguel,

California, is the sole owner and sole manager of FMC and sole manager of FDC.

12. Defendant Frost Management Company, LLC, a Delaware limited

liability company, was an exempt reporting investment adviser formerly located in

San Juan Capistrano, California. As of December 31, 2018, FMC failed to renew its

status as an exempt reporting adviser. It was the adviser to the five private venture

capital funds described below. FMC had assets under management of $49.9 million

at year-end 2016, the last year for which information is available. The last Form ADV

filed by FMC was dated February 8, 2017.

RELATED PARTIES

13. Frost Data Capital, LLC (“FDC”), formerly known as Frost Venture

Partners, LLC, is a Delaware limited liability company located in Orange County,

California. Frost’s family trust is the sole member, and Frost is the sole manager of

FDC.

14. Frost VP Seed, LLC (“Seed Fund”) is a Delaware limited liability

company formed in 2011. During the relevant time period, its manager was FMC.

15. Frost VP Seed International, LLC (“International Seed Fund”) is a

Delaware limited liability company formed in 2012. Its manager is FMC.

16. Frost VP Early Stage Fund II, LP (“Fund II”) is a Delaware limited

partnership formed in 2013. During the relevant time period, its general partner was

COMPLAINT 4

Frost Venture Partners GP, LLC. As of October 21, 2016, Frost was the sole member

of the general partner (at inception in May 2013, Frost was a 62.5% member).

17. FVP International Feeder Fund L.P. (“International Feeder Fund”) is a

Cayman Islands limited partnership formed in 2013. Its general partner is FMC.

18. Frost Fund III, L.P. (“Fund III”) is a Delaware limited partnership

formed in 2015. During the relevant time period, its general partner was Frost Fund

III, GP, LLC. As of December 31, 2016, Frost was the sole member of the general

partner (at inception in August 2015, Frost was an 81% member).

19. Collectively, the Seed Fund, International Seed Fund, Fund II,

International Feeder Fund, and Fund III are referred to herein as “the Funds.”

20. At all relevant times, each of the Funds was a “pooled investment

vehicle” within the meaning of Rule 206(4)-8 of the Advisers Act [17 C.F.R. §

275.206(4)-8].

THE ALLEGATIONS

21. Frost formed both FMC and FDC in 2011.

22. FMC was an exempt reporting investment adviser pursuant to Section

203(l) of the Advisers Act [15 U.S.C. §§ 80b-3(l)], which provides for exemption

from registration to investment advisers who act solely as an adviser to venture capital

funds.

23. Frost, who had no prior experience as an investment adviser or a fund

manager, owned and controlled both FMC and FDC.

A. FMC’s and Frost’s “Incubator Model”

24. From 2012 through 2016, FMC raised nearly $63 million from high net

worth individuals and trusts, who invested in the Funds as follows:

(a) The Seed Fund raised approximately $7,570,000 from roughly 30

investors in 2012.

(b) The International Seed Fund raised approximately £412,750

($636,798) from roughly 45 investors in 2012.

COMPLAINT 5

investors in 2013-2014.

(d) The International Feeder Fund raised approximately $5,250,000

from roughly two investors in 2013-2015, which was then invested in Fund II.

(e) Fund III raised approximately $13,440,000 from roughly 11

investors in 2015-2016.

25. FMC had no advisory clients aside from the Funds.

26. The Funds invested in portfolio companies created by FDC that had a

purported emphasis on big data analytics and cloud computing and later, the “internet

of things.”

27. FDC started 24 portfolio companies between 2012 and 2016.

28. In addition to the Funds, other investors in the portfolio companies

included high net worth individuals, trusts, non-Frost funds, and affiliates of public

companies.

29. FDC started, incubated, and provided support and services to the

portfolio companies.

30. The portfolio companies, in turn, paid FDC monthly fees for those

services.

31. Frost never capitalized FDC and operated it on a break-even basis.

32. FDC was financially dependent upon the incubator fees paid by the

portfolio companies because these fees were FDC’s only source of cash. In turn, the

portfolio companies were dependent upon the Funds and other investors to pay FDC’s

incubator fees.

33. Frost’s incubator model has not been successful. There have been no

returns to the Funds or their respective investors. As of early 2018, only a few of the

portfolio companies remained active.

1. The Funds’ Investment Committees

34. The Seed Fund’s operating agreement provided for the creation of an

COMPLAINT 6

investment committee, which generally consisted of no more than five (5) persons,

selected by Frost in his capacity as manager of FMC.

35. The Seed Fund’s investment committee was responsible for approving

all investments presented to it by Frost, in his capacity as manager of FMC.

36. The Seed Fund’s investment committee membership varied over time,

but always consisted exclusively of FDC insiders, and always included Frost.

37. Members of the Seed Fund’s investment committee could be removed

by Frost, in his capacity as manager of FMC, at his sole discretion.

38. All actions of the Seed Fund’s investment committee required at least a

majority vote of its members, provided, however, in the event of a tie vote, the

investment decision would be made by Frost, in his capacity as manager of FMC, in

his sole discretion, and all members of the investment committee would be required to

vote in accordance with the determination of the manager, i.e., Frost.

39. Fund II and Fund III also created investment committees. Membership

varied over time, but always consisted exclusively of FDC insiders, and always

included Frost.

2. The Funds’ Advisory Committees

40. The governing documents for each Fund also provided for the creation

of an advisory committee, generally consisting of three (3) to five (5) members,

appointed by Frost, in his capacity as manager of FMC, which was the manager of the

Seed Fund, the International Seed Fund, and the general partner of the International

Feeder Fund and in his capacity as the majority owner of the general partner of Fund

II. The governing document for Fund III provided that the limited partners,

representing a majority interest, may appoint an advisory committee.
41. According to the governing documents for the Funds, the duties of the

advisory committees were substantially the same, and included: (a) consideration of

any approvals sought by the manager or general partner; (b) advise regarding matters

pertaining to conflicts of interest between or among the manager or general partner,

COMPLAINT 7

any members of the manager or general partner; and (c) rendering such other advice

and counsel as requested by the manager or general partner.

42. Notwithstanding the duties of the advisory committees, Frost, in his

capacity as manager of FMC, which was the manager of the Seed Fund, the

International Seed Fund, and the general partner of the International Feeder Fund, or

as the majority owner of the general partner of Fund II and Fund III, retained ultimate

responsibility for making all investment decisions.

43. While the Funds’ governing documents called for the establishment of

advisory committees, in reality, only Fund II established an advisory committee. It

met on only two or three occasions, but no conflicts of interest were presented to Fund

II’s Advisory Committee.

3. Frost’s Solicitation of Investors and Prospective Investors

44. Frost solicited investors and prospective investors through the use of the

Internet, wire and other electronic means of communication, and at in-person and

group presentations.

45. Frost also made and used PowerPoint marketing presentations in

soliciting investors and prospective investors. Frost’s PowerPoint presentation for the

Seed Fund touted the “no fee” “no carry” opportunity to invest in “big data” analytics,

and specifically in start-up ideas and start-up companies, approved by a majority of a

fund’s investment committee, and then incubated by FDC, with exits projected from

2-5 years from startup by way of an acquisition by a “major player” in the computer

industry.

46. Investors in the Funds also signed operating and partnership agreements

that were countersigned by Frost, on behalf of the Funds’ manager or general partner.

47. Frost also provided investor executive summaries to investors and

prospective investors, which provided a high level summary of the Frost incubator

model, the investment focus of the particular fund, the deal structure, Frost’s

background and qualifications, and a short description of some of the companies then

COMPLAINT 8

being incubated.

48. Frost also provided Fund investors with quarterly status reports that

generally described that quarter’s acquisitions, the status or activities of the portfolio

companies in which the Fund had invested, and a valuation of the investments then

held.

49. Frost represented to investors and prospective investors that he

envisioned a highly-focused incubator model in which he would come up with ideas

or identify the needs of big data companies and pass them through FDC, the incubator.

FDC would then write up a business plan and pass that plan onto a newly created

portfolio company, which would obtain seed investments from the Funds or other

investors. The portfolio company would then incubate ideas into software that,

ideally, would eventually lead to an “exit,” either through sale of the software or the

company.

B. The Fraud

50. FMC and Frost defrauded the Funds and the investors in the Funds by:

(1) charging the portfolio companies, in which the Funds invested, undisclosed and

excessive incubator fees that were paid to Frost’s company, FDC; (2) not disclosing

the actual amount of incubator fees that the portfolio companies paid to FDC;

(3) creating more portfolio companies to generate even more excessive fees; and

(4) charging some Funds undisclosed management fees that were not earned and were

paid to FMC and Frost.

1. Undisclosed and Excessive Incubator Fees

51. FDC charged the portfolio companies over $14 million in undisclosed

and excessive incubator fees.

52. Although the Funds did not directly pay these fees, because the Funds

invested in the portfolio companies, the payment of these fees by the portfolio

companies weakened their financial condition and prospects for success, which, in

COMPLAINT 9

turn, harmed the Funds’ investments in those companies.

53. FDC charged a monthly incubator fee for operational support provided

to the portfolio companies.

54. However, in the Funds’ operating and partnership agreements, and in the

executive summaries given to Fund investors, FMC and Frost either completely failed

to disclose the existence of the FDC incubator fees (in the case of certain Funds) or

misleadingly represented that FDC would charge incubator fees on a case-by-case

basis or at or below market rates (in the case of the remaining Funds).

55. Similarly, none of the PowerPoint marketing presentations to investors

and prospective investors in the Funds disclosed the incubator fees.

56. In particular, both the governing documents and the PowerPoint

disclosure for the Seed Fund were completely silent on and failed to disclose the

existence of FDC incubator fees.

57. In addition, the executive summary for the Seed Fund stated:

Note that the [Seed Fund] will not be expected to cover expenses and

salaries incurred by FDC, which is a completely separate corporate

entity. It is expected that services provided from the incubator to the

startup companies will be agreed to between the boards of each

individual company and FDC on a case-by-case basis and expected to

be adjusted based on the individual needs of each company as their

business matures. FDC’s policy will be to only charge for services that

the startup companies would require in the normal course of business.

In general, this should mean that the startups receive higher quality

services at a lower price than they would otherwise be able to afford

(due to Frost VP’s ability to provide economies of scale).”

58. This disclosure was false and misleading. FDC did not charge the

portfolio companies in which the Seed Fund had invested incubator fees on an agreed,

case-by-case, individual needs basis, or at or below market rates.

COMPLAINT 10

59. In addition, by charging incubator fees to the portfolio companies in

which the Seed Fund had invested, the Seed Fund covered the expenses and salaries

incurred by FDC, contrary to what had been represented in the executive summary.

60. The governing documents for the International Seed Fund were also

completely silent on and failed to disclose the existence of FDC incubator fees.

61. The governing documents for Fund II disclosed that FDC “may” receive

a monthly service fee from the companies in which the partnership holds an

investment in exchange for certain shared advisory and support services provided by

FDC.

62. This partial disclosure was false and misleading, as the disclosure further

provided that the service fee would not reduce the 2% management fee payable to the

general partner so long as the fee does not exceed reasonable market rates.

63. In fact, the so-called “service” fee was neither based on reasonable

market rates, nor did it reduce the 2% management fees payable to the general partner.

64. Also, the PowerPoint disclosure for Fund II was silent regarding

incubator fees.

65. In addition, the executive summary for Fund II contained the same

misleading disclosure as the Seed Fund, quoted above in paragraph 57 above.

66. The governing documents for the International Feeder Fund disclosed

that FDC had been formed to provide an operating infrastructure to incubate and

develop new business, but those documents were silent regarding incubator fees.

67. Also, the PowerPoint disclosure for the International Feeder Fund was

silent regarding incubator fees.

68. In addition, the executive summary for the International Feeder Fund

stated that the portfolio companies would be provided with a variety of services, the

costs of which would be split between the various “ideas being incubated,” thereby

“lowering the cost to each incubated idea/company.”

69. This disclosure was false and misleading, as the manner in which the

COMPLAINT 11

incubator fees were charged did not lower the cost to each portfolio company.

70. Finally, the governing documents for Fund III disclosed that the

portfolio companies in which the fund invested would enter into agreements with FDC

pursuant to which each of the companies would reimburse FDC a monthly amount for

its share of the cost of resources provided by FDC for shared facilities, shared

personnel, and other shared resources.

71. This disclosure was false and misleading as fees charged to the portfolio

companies were not based on the company’s share of the cost of resources provided

by FDC for shared facilities, shared personnel and other shared resources; and, in fact,

the fees were excessive.

72. Both the PowerPoint and the executive summary for Fund III were silent

on incubator fees.

73. Rather than charge for services that the portfolio companies would

require in the normal course of business, FDC charged incubator fees from the

moment a portfolio company was formed, even if the company had no employees.

74. The fees also were not negotiated on a case-by-case basis. Rather, they

were fixed at a flat rate, typically about $30,000 to $40,000 per month, regardless of

the level of development of a portfolio company.

75. The incubator fees were not adjusted as the number of a portfolio

company’s employees increased or decreased. Portfolio companies that moved out of

FDC’s offices paid the same as portfolio companies that used FDC’s space.

76. No effort was made to allocate the time FDC’s staff spent working on

tasks for the different portfolio companies.

77. In most instances, the service agreements providing for the payment of

the incubator fees were signed by Frost, as CEO of the portfolio company, and by

FDC’s CFO, before the portfolio company was officially formed.

78. Cancellation of the service agreements required 180 days’ notice. As a

result, once a CEO was hired for a new portfolio company, the company was burdened

COMPLAINT 12

with a non-negotiable, non-cancellable fee for at least six months.

79. These fees caused the portfolio companies to burn through their cash

quickly, thereby shortening their “runway” and reducing the likelihood of a successful

exit.

80. Several CEOs of the portfolio companies voiced their concern to Frost

and other members of FDC’s management over the exorbitant incubator fees.

81. Some of the CEOs of the portfolio companies attempted to negotiate the

amount of the incubator fees.

82. Frost refused to negotiate the amount of the incubator fees, and

informed at least one CEO that the incubator fees were “prix fixe,” not “a la carte.”

83. Frost also was part owner of a second incubator-related company, Snow

Data Capital (“SDC”).

84. SDC was created in 2014, ostensibly to provide marketing services to

the portfolio companies.

85. In fact, SDC was created to provide employment to one of Frost’s

friends who needed to qualify for a green card for immigration purposes. Rather than

making his friend an employee of FDC, which already provided marketing services,

Frost created SDC, which then began charging the portfolio companies an additional

$5,100 per month for marketing.

86. FDC’s overall incubator fees included SDC’s marketing fees.

87. Frost never disclosed to the Funds or to the Funds’ investors the

existence of SDC or its fees.

88. Of the $21.69 million in incubator fees charged to the portfolio

companies in which the Funds had invested, over $14 million of FDC’s fees exceeded

reasonable incubator fees and thus were excessive.

2. Undisclosed Incubator Fee Amounts

89. FMC and Frost failed to disclose the incubator fees paid by the portfolio

COMPLAINT 13

companies or their amounts in the Funds’ quarterly status reports which were

distributed to the Funds’ investors.

90. FMC and Frost also failed to disclose the incubator fees paid by the

portfolio companies or their amounts to the Fund II advisory committee, the only fund

that had an advisory committee.

91. The Fund II advisory committee met on two or three occasions, and

incubator fees were not disclosed, discussed, or consented to at any of those meetings.

3. Generation of Additional Incubator Fees

92. As Frost’s and FDC’s expenses grew, Frost created new portfolio

companies to generate additional incubator fees.

93. Although Frost disclosed to potential investors in the PowerPoint

marketing materials that he contemplated starting only two to four portfolio

companies per year, in fact, Frost created 12 of the 24 portfolio companies between

April 2014 and February 2015, when Frost and his family temporarily moved to Italy

and charged many personal expenses to FDC.

94. Frost’s apparent need for cash, as opposed to new start-up ideas, led to

the creation of many of the new portfolio companies.

95. One of the reasons FDC’s costs kept growing was because Frost paid

himself a generous salary (approximately $3.4 million from 2012 through 2016) and

also charged extensive personal expenses to FDC (over $867,000 from 2012 through

2016).

96. Personal expenses charged to FDC included Frost’s personal chef,

housekeeper, wine locker, archery range, boat payments and maintenance, beach club

membership, lease payments for luxury cars, and payments of charges (averaging a

total of $18,000 per month) made on three personal credit cards.

97. In addition, emails show Frost and FDC’s CFO discussing that new

companies and the resultant incubator fees were needed to make ends meet.

COMPLAINT 14

98. For example, in an email dated June 10, 2016, Frost told FDC’s CFO

that it was “critically important to get the incubator to break even ASAP.” Frost also

told FDC’s CFO that “to achieve this we need to … start a few new companies

ASAP” and also “move costs to the newcos [new portfolio companies] by assigning

some of our incubator execs as CEO/CTO.”

99. Once Frost decided to start a new portfolio company, the matter would

be submitted to a fund’s investment committee, which determined how many portfolio

companies would be created and how much a fund would invest in each newly created

company.

100. A fund’s investment committee, which was controlled by Frost, would

typically approve the creation of the company and the amount to be invested.

101. In addition, Frost was the only member of Fund III’s investment

committee in late 2016, and was thus solely responsible for approving the fund’s

investment in the last two newly formed portfolio companies.

4. Undisclosed and Unearned Management Fees
102. FMC and Frost also collected undisclosed management fees from the

Seed Fund and International Seed Fund.

103. The governing documents for these two funds did not disclose or

authorize the payment of management fees.

104. Nevertheless, from 2012 to 2014, FMC charged the Seed Fund $378,000

in management fees and the International Seed Fund $24,875 in management fees.

105. In addition, FMC and Frost collected unearned management fees from

Fund II that should have been offset by incubator fees that exceeded market rates.

106. Fund II’s governing document allowed its general partner to collect a 2%

management fee. The governing document also provided that incubator fees paid to

FDC would not reduce the management fee “so long as such [incubator] fees [do] not

exceed reasonable market rates.”

107. Fund II paid management fees of over $1.7 million. The excess

COMPLAINT 15

incubator fees charged to Fund II should have been used to offset those management

fees.

C. Materiality

108. The Funds and their investors and prospective investors would have

considered it important to know that the portfolio companies in which they had

invested were paying undisclosed and excessive incubator fees that depleted the

portfolio companies’ assets.

109. The Funds and their investors and prospective investors would also have

considered it important to know that some of the portfolio companies in which they

had invested were created for the principal purpose of generating additional

incubator fees to cover Frost’s extravagant personal expenses.

110. The Seed Fund, the International Seed Fund, and their investors and

prospective investors would have considered it important to know that that these two

funds were paying undisclosed management fees that directly impacted the Funds’

assets.

111. Fund II and its investors and prospective investors would have

considered it important to know that the fund had paid unearned management fees

that directly impacted the Fund’s assets.

D. Frost Acted Knowingly or, at a Minimum, Negligently

112. Because Frost was FMC’s sole owner and manager, majority or sole

owner of the Funds’ managing members and general partners, and FDC’s sole owner

and managing member, Frost knew, or was reckless in not knowing, that it was a

breach of his fiduciary duty to charge undisclosed and excessive incubator and

management fees.

113. At a minimum, Frost acted negligently by falling below the standard of

care expected of an investment adviser by charging and not disclosing these

undisclosed and excessive fees. For an investment adviser, the standard of care is

based on its fiduciary duty. As a fiduciary, Frost owed his clients undivided loyalty

COMPLAINT 16

and should not have engaged in activity that conflicted with his clients’ interest.

114. Because Frost controlled FMC, his scienter and/or negligence can be

imputed to FMC.

E. Frost and FMC Acted as Investment Advisers

115. At all relevant times, both Frost and FMC were investment advisers

within the meaning of Section 202(a)(11) of the Advisers Act [15 U.S.C. §§ 80b-

2(a)11)], as they both, for compensation, engaged in the business of advising others,

either directly or through publications and writings, as to the value of securities or as

to the advisability of investing in, purchasing or selling securities.

116. FMC provided investment advice for compensation, and also filed

reports with the SEC as an exempt reporting adviser.

117. Frost was the sole owner and manager of FMC, and he received

compensation for giving advice to the Funds.

118. The limited partnership and membership interests in the Funds, as well

as the shares of stock of the portfolio in which the Funds invested, are securities.

F. Defendants’ Tolling Agreements

119. Frost and FMC have each entered into tolling agreements with the SEC

to toll the running of any statute of limitations for an action or proceeding against

them which permits any sanctions or relief that may be sought or imposed in such

action or proceeding starting January 1, 2014.

FIRST CLAIM FOR RELIEF

Fraud by an Investment Adviser

Violations of Sections 206(1) and 206(2) of the Advisers Act

(against Defendants Frost and FMC)

120. The SEC realleges and incorporates by reference paragraphs 1 through

119 of this Complaint as if fully set forth herein.

121. Defendants Frost and FMC, at all relevant times, were investment

advisers within the meaning of Section 202(a)(11) of the Advisers Act [15 U.S.C. §

COMPLAINT 17

80b-2(a)(11)].

122. Among other things, Frost and FMC made material misstatements and

omissions, and breached their fiduciary duties to the Funds, by failing to disclose

material information and conflicts of interest regarding the incubator fees charged by

FDC, including:

(a) failing to disclose to the Seed Fund, International Seed Fund, and

International Feeder Fund that the portfolio companies in which they invested would

be charged incubator fees;

(b) failing to disclose to the Funds that the portfolio companies would

be charged flat-rate incubator fees as opposed to incubator fees charged on a case-by-

case basis, or at or below market rates;

the portfolio companies in quarterly status reports provided to the Funds’ investors;

(d) failing to disclose the existence or the amount of incubator fees

actually charged to the portfolio companies to the Funds’ advisory committees;

(e) failing to disclose to the Funds that Frost created some of the new

portfolio companies for the principal purpose of generating additional incubator fees

to cover FDC’s overhead and Frost’s extravagant personal expenses; and

(f) charging the portfolio companies in which the Funds invested

over $14 million in excessive incubator fees.

123. In addition, FMC and Frost charged the Seed Fund and International

Seed Fund undisclosed management fees of $402,875 and improperly charged Fund II

over $1.7 million in management fees that should have been offset by the excessive

incubator fees charged.

124. By engaging in the conduct described above, Frost and FMC, and each

of them, directly or indirectly, by use of the mails or means and instrumentalities of

interstate commerce, knowingly and/or recklessly: (a) employed or are employing

devices, schemes or artifices to defraud clients or prospective clients; and knowingly,

COMPLAINT 18

recklessly and/or negligently (b) engaged in or are engaging in transactions, practices,

or courses of business which operated as a fraud or deceit upon clients or prospective

clients.

125. By engaging in the conduct described above, Frost and FMC, and each

of them, have violated, and unless restrained and enjoined, are reasonably likely to

continue to violate, Sections 206(1) and (2) of the Advisers Act [15 U.S.C. §§ 80b-

6(1) & 80b-6(2)].

SECOND CLAIM FOR RELIEF

Fraud Involving a Pooled Investment Vehicle

Violations of Section 206(4) of the Advisers Act and Rule 206(4)-8(a)(1)-(a)(2)

(against Defendants Frost and FMC )

126. The SEC realleges and incorporates by reference paragraphs 1 through

119 above.

127. FMC and Frost repeatedly defrauded investors in the Funds by failing to

disclose the existence of and/or the amount of incubator fees and management fees,

thus making the Funds’ governing agreements, pitch materials, and quarterly status

reports misleading.

128. FMC and Frost engaged in multiple years of deceptive conduct by

charging undisclosed, excessive and/or improper incubator and management fees and

by starting new portfolio companies to generate additional incubator fees to cover

FDC’s overhead and Frost’s personal expenses.

129. By engaging in the conduct described above, Defendants Frost and

FMC, and each of them, directly or indirectly, by engaging in the conduct described

above, while acting as an investment adviser to a pooled investment vehicle, directly

or indirectly, by use of the mails or means or instrumentalities of interstate commerce,

knowingly, recklessly and/or negligently: (a) made untrue statements of a material

fact or omitted to state a material fact necessary in order to make the statements made,

in the light of the circumstances under which there were made, not misleading, to any

COMPLAINT 19

investor or prospective investor in the pooled investment vehicle; or (b) engaged in

acts, practices, or courses of business that were fraudulent, deceptive, or manipulative

with respect to any investor or prospective investor in the pooled investment vehicle.

130. By engaging in the conduct described above, Defendants Frost and

FMC, and each of them, have violated, and unless restrained and enjoined, are

reasonably likely to continue to violate, Section 206(4) of the Advisers Act [15 U.S.C.

§ 80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].

PRAYER FOR RELIEF

WHEREFORE, the SEC respectfully requests that the Court:

Issue findings of fact and conclusions of law that Defendants committed the

alleged violations.

II.

Issue judgments, in forms consistent with Rule 65(d) of the Federal Rules of

Civil Procedure, permanently enjoining Frost and FMC, and their officers, agents,

servants, employees and attorneys, and those persons in active concert or

participation with any of them, who receive actual notice of the judgment by personal

service or otherwise, and each of them, from violating Sections 206(1), 206(2) and

206(4) of the Advisers Act [15 U.S.C. §§ 80b-6(1), 80b-6(2), and 80b-6(4)] and Rule

206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].

III.

Order Defendants to disgorge all funds received from their illegal conduct,

together with prejudgment interest thereon, on a joint and several basis.

IV.

Order Defendants to pay civil penalties under Section 209(e) of the Advisers

Act [15 U.S.C. § 80b-9(e)].

Retain jurisdiction of this action in accordance with the principles of equity and

COMPLAINT 20

the Federal Rules of Civil Procedure in order to implement and carry out the terms of

all orders and decrees that may be entered, or to entertain any suitable application or

motion for additional relief within the jurisdiction of this Court.

VI.

Grant such other and further relief as this Court may determine to be just and

necessary.

Dated: August 13, 2019

/s/ Donald W. Searles
DONALD W. SEARLES
Attorney for Plaintiff
Securities and Exchange Commission

8:19-cv-01559 Securities and Exchange Commission v. Frost et al

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

Notice of Electronic Filing

The following transaction was entered by Searles, Donald on 8/13/2019 at 1:17 PM PDT and filed on
8/13/2019
Case Name: Securities and Exchange Commission v. Frost et al
Case Number: 8:19-cv-01559
Filer: Securities and Exchange Commission
Document Number: 1

Docket Text:
COMPLAINT No Fee Required - US Government, filed by Plaintiff Securities and
Exchange Commission. (Attorney Donald W Searles added to party Securities and
Exchange Commission(pty:pla))(Searles, Donald)

8:19-cv-01559 Notice has been electronically mailed to:

Donald W Searles [email protected], [email protected], [email protected], [email protected],
[email protected]

8:19-cv-01559 Notice has been delivered by First Class U. S. Mail or by other means BY THE
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Document description:Main Document
Original filename:C:\Users\delgadilloj\Desktop\8.13.19 Frost Filing\Frost Complaint 8.01.2019.pdf
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[STAMP cacdStamp_ID=1020290914 [Date=8/13/2019] [FileNumber=28212739-0
] [b8ee42bb97b225065d4e502c1e13fa4a18bcce6827de2f069d5f57fd36ea43980b6
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COMPLAINT 1

DONALD W. SEARLES (Cal. Bar No. 135705)
Email: [email protected]
JANET MOSER (Cal. Bar No. 199171)
Email: [email protected]

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

vs.

STUART FROST and FROST
MANAGEMENT COMPANY, LLC,

Defendants.

Case No.

COMPLAINT

Plaintiff Securities and Exchange Commission (“SEC”) alleges:

JURISDICTION AND VENUE

1. The Court has jurisdiction over this action pursuant to Sections 209(d),

209(e)(1) and 214 of the Investment Advisers Act of 1940 (“Advisers Act”) [15

U.S.C. §§ 80b-9(d), 80b-9(e)(1) & 90b-14].

2. Defendants have, directly or indirectly, made use of the means or

instrumentalities of interstate commerce, of the mails, or of the facilities of a national

securities exchange in connection with the transactions, acts, practices and courses of

Case 8:19-cv-01559 Document 1 Filed 08/13/19 Page 1 of 20 Page ID #:1