SEC: Fund managers defrauded Facebook investors

A framed Facebook logo, filled with employees' signatures, hangs in the lobby of the company's Palo Alto, Calif., building in June 2009. James Martin/CNET

(MoneyWatch) Facebook has yet to go public, but it is already a breeding ground for securities fraud. The SEC late Wednesday filed charges against two money managers for misleading investors eager to buy stock in the social networking company ahead of Facebook's highly anticipated IPO later this year.

The SEC alleges that the fund managers raised a total more than $70 million from investors to acquire shares of Facebook, Twitter, and other technology companies before they go public. In a related move to clean up the growing market for shares in popular social media firms, securities regulators also accused an online service called SharesPost that matches buyers and sellers of pre-IPO stock of operating without registering as a broker-dealer, as required by law.

2 managers of private-share funds charged by SEC
SEC complaint against Frank Mazzola

Facebook IPO, interesting fact since the SEC filing

SEC official say the secondary market for shares in pre-IPO companies is growing and poses a risk even to sophisticated investors. "While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation," said Robert Khuzami, director of the SEC's enforcement division, in a statement.

The SEC alleged that money manager Frank Mazzola and his firms, Felix Investments and Facie Libre Management, created two funds to invest in Facebook and other high-profile tech companies. But the firms engaged in "improper self-dealing" by collecting higher commissions than what they had disclosed in marketing materials aimed at investors seeking to purchase Facebook stock, according to the agency. SEC officials said that improperly raised the price of shares in the social network.

Mazzola and his investment firms also are accused of deceiving investors in funds that had been created to buy stock in pre-IPO companies. One investor was falsely told that a fund set up Mazzola's firms had acquired stock in Zynga (ZNGA), a well-known social gaming company that went public in December. The firms also allegedly made false claims about the financial performance of Twitter to attract investors to a fund set up to buy stock in the micro-blogging startup before it goes public.

A representative from Felix Investments did not immediately return a call for comment.

"In the course of operating these funds, defendants misled investors about the compensation they earned, engaged in undisclosed self-dealing adverse to the funds and the funds' investors, lied about the amount ofstock the funds actually held, and freely misstated material facts about the companies in which the funds were investing to attract potential investors," the SEC said in its complaint against Mazzola and his firms, which are said to have raised a total of $56 million.

In an administrative action, the SEC alleged that fund manager Laurence Albukerk of EB Financial Group secretly overcharged investors in two Facebook funds manged by the firm. Without admitting or denying the agency's finding, Albukerk consented to having violated securities law and agreed to pay restitution and a penalty of $310,499.

The SEC heightened its scrutiny of the market for shares in pre-IPO companies in 2011 after Goldman Sachs (GS) arranged a $1.5 billion private-placement of Facebook stock.

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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