Federal regulators are widening their investigation into the activities of controversial Twin Cities money manager David Blaine Welliver, court documents filed in St. Paul this week indicate.
The U.S. Securities and Exchange Commission (SEC) filed a federal lawsuit in October accusing the former Minneapolis police and fire pension fund adviser of fraud and "flagrant and numerous" securities violations related to his advisory business, Dblaine Capital.
The suit says that Welliver, 51, of Buffalo, has a history of misconduct in the industry and alleges that he misrepresented the value of a mutual fund he managed in 2010 and spent about $500,000 of his investors' money on personal items, including an expensive car, vacations, liquor, meals, home improvements, jewelry, his son's college tuition and back taxes.
In filings this week, SEC lawyers say they've learned that Welliver opened a new business called Stringfield Capital just a month after they sued him. They say he's offering investors "a whopping 12 percent annual return" that he can't possibly pay, adding that he may be violating securities laws even as the suit proceeds.
Late last month, the SEC served subpoenas on two companies that certify compliance with a rigorous financial reporting system known as the Global Investment Performance Standard (GIPS). The subpoenas seek all information related to work they've done on behalf of Welliver, Stringfield, DBlaine Capital, or a mutual fund called DBlaine Fund.
Welliver attorney Jared Kemper responded with a motion seeking to prohibit regulators from discovering or disclosing information about Stringfield, arguing that it's unrelated to the SEC's lawsuit.
Welliver could not be reached for comment this week. But in a deposition in late July, he described Stringfield as a firm that he owns and operates.
Welliver said he's managing about $800,000 in investments at no charge for former Twin Cities residents Mark and Toni Hengesteg, whom he described as "accredited investors," meaning they have a high net worth. He said that he also transferred shares from DBlaine Capital to Stringfield for at least one investor he identified as Dawn Howe. He said he couldn't remember if he'd offered anyone else shares in Stringfield.
Eventually, he confirmed to SEC lawyers that a friend had invested $25,000 in the company. He identified that investor as Laura Loupdre, misspelling her name. Her name is actually spelled Lora LePoudre.
The 44-year-old Minneapolis woman does not appear to be wealthy. Court records show she was making a modest income in 2009 from her own "modeling and cleaning business" known as Powder Productions, when she went bankrupt.
Welliver offered LePoudre 12 percent annual interest, paid quarterly, plus 5 percent of all dividends and earnings at Stringfield.
"And how is Stringfield able to generate 12 percent interest to pay its investors?" an SEC attorney asked at his deposition.
"It isn't, at this point. It is totally a speculative investment," Welliver responded.
Asked if the materials he gave LePoudre describe the investment that way, he said: "She understands. She knows very well."
The 10th dimension
The Star Tribune obtained a copy of a Stringfield private placement memorandum that says the company's name was derived from "theoretical physics as it relates to Field Theory and String Theory within the 10th dimension." The company claims to select stocks based on a system "developed to achieve returns that outperform the S&P 500 on a consistent basis" while minimizing risks.
Welliver discloses the SEC lawsuit in the document and says he plans to defend himself "to the fullest extent possible." He claims to have an outstanding investment record and boasts that he's "ranked by Morningstar as a five-star manager in the Large Cap Blend Category for separate accounts."
Morningstar spokeswoman Alexa Auerbach said the investment research firm ranks mutual funds, not managers. The star ratings for private accounts is based on unverified data reported by the investment manager. Auerbach said Welliver transferred the purported performance data from Dblaine Capital to Stringfield last November.
Stringfield claims a cumulative return "since January 2007" of 53.52 percent.
Benjamin Skjold, one of Welliver's attorneys, said his client wouldn't comment publicly on matters involving clients or "alleged investigative matters with the SEC."
Welliver's no stranger to the hot seat. The Minneapolis Police Relief Association and the Minneapolis Fire Fighters Relief Association won a $14.6 million judgment against him in 2000 on allegations that he mismanaged fund assets. In 2003, he pleaded guilty to misdemeanor charges related to his failure to file IRS employee benefit plan forms.
And in 2004, he consented to a $19,161 judgment to settle a U.S. Department of Labor complaint alleging that he had transferred funds from his company's retirement savings plan to his personal bank account.
Dan Browning • 612-673-4493