Tamarac Is Tainted By Spangler Scandal, But Could It Be Hurt Financially? Hot

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Neither Tamarac nor its management is accused of any wrongdoing. The company is respected as a technology vendor serving sophisticated RIAs.


However, Tamarac is alleged to have been funded illicitly by Spangler, according to a sworn affidavit by an FBI agent that was filed September 23 in U.S. District Court in Seattle in support of an application for a search warrant on Spangler’s home in search of evidence. According to the FBI agent who led the raid on Spangler’s home, Spangler “diverted investor funds in order to invest in companies in which he had an interest.”


Spangler is a one-time leader of the fee-only only financial advisor movement, having served as President and Chairman of the National Association of Financial Planners from 1996 to 1998. He led a short-lived NAPFA campaign to trademark the term “fee-only” to prohibit advisors who were not members of NAPFA to use the term “fee-only” in marketing their services.


The criminal allegations involve Limited Liability Companies set up by Spangler in the 1990s to invest client assets in securities of publicly-held companies. The affidavit says Spangler changed the private placement memoranda of his LLCs in 2008 to allow him to invest client assets into privately-held ventures instead of publicly traded securities, but alleges that Spangler did not disclose the change to some clients. Tamarac, along with TeraHop Networks, a reportedly defunct IT company, are two of several privately-held Spangler ventures named in court papers.


Two married couples, who were clients of Spangler’s and are identified in the affidavit only by their initials, invested a total of $5.9 million with Spangler Group. One couple became a client of Spangler’s in 1994 and the other in 2004. They estimate that they have lost about half of the $5.9 million Spangler managed for them because he invested their money without their knowledge in TeraHop and Tamarac.


As much as $86 million of the $106 million that Spangler Financial Group reported it managed in its May 2011 Form ADV may be lost or misappropriated, according to the FBI affidavit.


“The allegations in this affidavit first came to the attention of the FBI after I learned of a Securities and Exchange Commission examination of Spangler and his affiliated companies,” says FBI Special Agent Spencer Walker in his affidavit.


According to the affidavit one of the Spangler LLCs, known as Income+, transferred $1 million to Tamarac between April 2006 and May 2008. Another LLC, Equity Investors, transferred $1.6 million to another LLC, Spangler Ventures Nine, which was created specifically to invest in Tamarac. 


According to the affidavit, an investor in the Income + and Equity Investors LLCs, identified only as “ V.I.” received a letter in May 2008 along with a revised operating memorandum on a CD-ROM that explained changes to the LLC operating agreement. That the letter, says the affidavit, did not disclose that her money would be invested in Tamarac and other private companies instead of publicly-held securities. The client conceded n the affidavit that she did not review the revised private placement memo on the CD-ROM that was sent to her by Spangler.


The client in November 2010 met with Spangler and learned then that her portfolio was invested substantially in private companies related to Spangler. According to the affidavit, Spangler provided the client with a pie chart showing that 65% of her portfolio was invested in debt securities. The FBI’s Walker alleges that at least some of those debt securities were loans to Tamarac and other privately-held Spangler-affiliated ventures.


When the client learned that her equity assets, which she thought were invested in public-held companies, were heavily invested in private companies, the affidavit says, she asked Spangler to liquidate the positions. A portfolio report she received from Spangler reportedly valued her assets at $3.1 million at the end of December 2010.


The affidavit outlines similar allegations made by other high-net-worth individuals who are feared to each have suffered multimillion dollar losses. “Spangler PPAs (portfolio position analyses) are misleading as to value,” the affidavit charges, referring to performance statements sent by Spangler to clients. Basically, the FBI agent alleges Spangler lied to clients in their portfolio reports about the value of the privately-held companies in which he had invested their assets.


Tamarac executives contend the affidavit is misleading.


“We disagree with the affidavit, which implied that shareholders in Tamarac did not know they were investing in Tamarac,” says Tamarac’s CEO Stuart DePina. “That is untrue. Our shareholders, as they are today, know what they’ve invested in and are ecstatic about what they invested in.”


DePina says Tamarac has shown “better than 50% a year growth for the last five years.”


“If anyone who was on the train who did not know they were on train,” says DePina, “they got to ride on a train moving in the right direction.”


DePina says any investors in Tamarac who want to liquidate their holdings “could do it in a heartbeat.”


Difficulty, however, may not come from shareholders in Tamarac, but from investors in Spangler’s other deals, such as TeraHop, which failed.


In February 2011, Spangler allegedly told the two couples that were clients that he had changed the operating agreements governing the LLCs in 2008 without their knowledge and that he had invested in privately held companies instead of publicly-held companies. Other clients, according to the affidavit, learned in late 2010 that their assets had been diverted to privately held tech ventures.  


While it’s not in the affidavit, it’s likely that the SEC investigation began in late 2010 and, as it progressed, Spangler had little choice other than to reveal to clients that their operating agreements were altered by him in 2008. If the reaction of clients was to demand that Spangler divest their holdings in the private ventures, that would have caused a liquidity crisis.


In November 2010, for example, after learning that Spangler had invested her assets in TeraHop and Tamarac, the client identified in the affidavit as VI asked Spangler to liquidate her positions and return her money. Spangler told her he could liquidate 80% of the portfolio the second quarter of 2011.


On May 20, 2011, several clients filed an arbitration claim against Spangler, according to the affidavit. However, Spangler on June 28 successfully asked a court to put the assets of his ventures and his personal assets into receivership.


One problem for Tamarac is that the court-appointed receiver could try to recover money from Tamarac on behalf of investors in TeraHop .


Scott Matasar, a securities lawyer in Cleveland and blogger on A4A who read the FBI affidavit, says there are “so many holes” in the story that we still don’t know, adding, however, that “If Spangler did indeed divert money to Tamarac’s operations, it could get dicey for Tamarac,” he says.


Matasar says Tamarac’s executives might be asked to explain where that capital had come from. “The question could come down to whether Tamarac has enough cash or can settle with any victimized investors whose money was diverted to the company without their knowledge,” says Matasar. “It could be a huge distraction for Tamarac’s management to have to deal with this.”


It’s also possible that the receiver could try to “clawback” at profits made my Tamarac, as has been done by the receiver in the Madoff fraud. But Matasar says this is a much less likely scenario.


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