Feds investigate Stephen Coleman
By Kelsey Volkmann--St. Louis Business Journal
The U.S. Justice Department and the U.S. Postal Inspection Service are the latest to investigate St. Louis investment adviser Stephen Coleman of Daedalus Capital for alleged fraud.
Coleman has been under investigation by Missouri Commissioner of Securities Matthew Kitzi for alleged securities fraud after investors complained Coleman misled them. That investigation found that Coleman offered unregistered securities and committed securities fraud. As a result, Coleman and his companies were ordered to pay more than $38,000 in penalties and costs to the state.
Coleman declined to comment, saying ‽it s still a legal matter.” His brother and attorney Larry Coleman also declined to comment.
The fine is the latest chapter in the investment manager s celebrated " and controversial " career. Stephen Coleman garnered national media attention with Bloomberg News in 2007 and Black Enterprise magazine in 2000 for engineering big returns for his clients even as some investors were complaining.
Investors complain
A 22-year-old Missouri woman was looking for a safe place to invest her inheritance so she could get married and buy a house. Her father referred her to Stephen Coleman, and his now-defunct Chicken Little Fund Group, which managed a mutual fund, according to the securities division of the Missouri Secretary of State s Office.
The woman bought 225 shares of Chicken Little Fund Group and other stocks Stephen Coleman recommended for $25,500 in January 2005. She received dividend checks of about $700 a month for a year and then the checks stopped coming, according to the state.
The woman, whom the state hasn t identified, is one of three victim complaints outlined in the Missouri commissioner of securities case against Stephen Coleman.
In February 2006, a 62-year-old Missouri resident used a portion of his retirement funds to purchase 200 shares of preferred stock of Chicken Little Fund Group for $20,000. According to the state complaint, the investor requested a low-risk investment because he was retired and living on a fixed income, but he never saw any dividend payments.
A Georgia woman bought 200 shares for $20,000 after being introduced to Chicken Little Fund Group through her MetLife financial planner, Don Roman, who was familiar with Stephen Coleman, according to the state complaint. She received one dividend payment of $625 in December 2005. The alleged victim made an additional investment of $50,000 but has not seen a return on that investment, the state said.
Making a case
In all, Kitzi said his office investigated the ‽activities and issues” of 45 investors involved with Stephen Coleman, involving hundreds of thousands of dollars.
In its case against Stephen Coleman, the state alleged that he and his Daedalus Capital and Chicken Little Fund Group used investors money for Coleman s salary, a $30,000 financial plan for him and his wife, and to pay off a $100,000 personal tax lien, leaving little money to pay the expenses of the Chicken Little mutual fund.
The state also alleged that Stephen Coleman sold investments in Chicken Little Fund Group to clients of his investment advisory firm, Daedalus Capital, without revealing the potential conflicts of interest. The Chicken Little Growth Fund, the first fund created out of the Chicken Little Fund Group, started in 2005 and grew to more than $1.2 million in assets before it closed in 2007 after Stephen Coleman was late in paying operating expenses.
Stephen Coleman also failed to disclose two prior civil judgments for breaches of contract involving non-payment of promissory notes and a short-term loan. The judgments were filed against him and his companies in 1997, according to the state complaint.
Stephen Coleman had requested a hearing to contest the claims made by the state, but after more than a year, withdrew his request in November, citing a Justice Department and Postal Service investigation ‽arising out of and or related to these proceedings,” according to a notice filed by Larry Coleman with the state.
This past week, the state fined Stephen Coleman and referred the case to the Missouri Administrative Hearing Commission for a hearing on whether to suspend or revoke Stephen Coleman s securities license. The hearing is set for April 16.
Other inquiries
By his own admission, Stephen Coleman is no stranger to investigations.
In a letter sent to Kitzi s office dated July 15, 2008, Stephen Coleman said he has been the subject of various inquiries.
‽There have been challenges,” he wrote. ‽The current matter with the Missouri secretary of state is unique in only one respect: The state made its allegations public. There have been many prior, private investigations. The state has investigated me on two other occasions, with no effect. The Securities and Exchange Commission has investigated me on three occasions over the past 20 years, with no effect. They look and they leave.
‽The real question is why did they come? I believe it is because we are small and, therefore, perceived to be easy prey by them or a competitor. I also believe that our consistent excellence as equity investors puzzles some folks.”
SEC spokesman John Hiney said he couldn t find any public documents confirming any past probe into Stephen Coleman or his companies. If the SEC never takes action against someone, the agency can open and close a case without any public disclosure. As far as this latest case of alleged securities fraud, Hiney said he could neither confirm nor deny any SEC investigation. Jan Diltz, a spokeswoman for U.S. Attorney Catherine Hanaway, also said she couldn t confirm nor deny any investigation into Stephen Coleman.
~Volatile manager
In 2000, the St. Louis Public School Retirement System, which, at the time, served nearly 10,000 active and retired employees, dismissed Daedalus Capital as one of its financial managers. The pension board s investment adviser, Doris Ewing, a partner with New England Pension Consultants, said Daedalus, which parlayed an $8 million investment into $62 million, was the ‽most volatile manager.”
‽Volatility is not a bad thing,” Stephen Coleman said at the time. ‽Over performance against our (S&P 500) benchmark is positive volatility.”
Stephen Coleman, along with Rick Johnson, also ran ColJon Holdings Inc., an unsuccessful group of companies funded primarily with venture capital money from the school pension fund. The ColJon investments were at the center of months of turmoil on the pension board, ultimately resulting in several lawsuits among trustees and against Stephen Coleman. The American Arbitration Association found the retirement system was entitled to recoup $2.8 million from ColJon companies.
The U.S. Justice Department and the U.S. Postal Inspection Service are the latest to investigate St. Louis investment adviser Stephen Coleman of Daedalus Capital for alleged fraud.
Coleman has been under investigation by Missouri Commissioner of Securities Matthew Kitzi for alleged securities fraud after investors complained Coleman misled them. That investigation found that Coleman offered unregistered securities and committed securities fraud. As a result, Coleman and his companies were ordered to pay more than $38,000 in penalties and costs to the state.
Coleman declined to comment, saying ‽it s still a legal matter.” His brother and attorney Larry Coleman also declined to comment.
The fine is the latest chapter in the investment manager s celebrated " and controversial " career. Stephen Coleman garnered national media attention with Bloomberg News in 2007 and Black Enterprise magazine in 2000 for engineering big returns for his clients even as some investors were complaining.
Investors complain
A 22-year-old Missouri woman was looking for a safe place to invest her inheritance so she could get married and buy a house. Her father referred her to Stephen Coleman, and his now-defunct Chicken Little Fund Group, which managed a mutual fund, according to the securities division of the Missouri Secretary of State s Office.
The woman bought 225 shares of Chicken Little Fund Group and other stocks Stephen Coleman recommended for $25,500 in January 2005. She received dividend checks of about $700 a month for a year and then the checks stopped coming, according to the state.
The woman, whom the state hasn t identified, is one of three victim complaints outlined in the Missouri commissioner of securities case against Stephen Coleman.
In February 2006, a 62-year-old Missouri resident used a portion of his retirement funds to purchase 200 shares of preferred stock of Chicken Little Fund Group for $20,000. According to the state complaint, the investor requested a low-risk investment because he was retired and living on a fixed income, but he never saw any dividend payments.
A Georgia woman bought 200 shares for $20,000 after being introduced to Chicken Little Fund Group through her MetLife financial planner, Don Roman, who was familiar with Stephen Coleman, according to the state complaint. She received one dividend payment of $625 in December 2005. The alleged victim made an additional investment of $50,000 but has not seen a return on that investment, the state said.
Making a case
In all, Kitzi said his office investigated the ‽activities and issues” of 45 investors involved with Stephen Coleman, involving hundreds of thousands of dollars.
In its case against Stephen Coleman, the state alleged that he and his Daedalus Capital and Chicken Little Fund Group used investors money for Coleman s salary, a $30,000 financial plan for him and his wife, and to pay off a $100,000 personal tax lien, leaving little money to pay the expenses of the Chicken Little mutual fund.
The state also alleged that Stephen Coleman sold investments in Chicken Little Fund Group to clients of his investment advisory firm, Daedalus Capital, without revealing the potential conflicts of interest. The Chicken Little Growth Fund, the first fund created out of the Chicken Little Fund Group, started in 2005 and grew to more than $1.2 million in assets before it closed in 2007 after Stephen Coleman was late in paying operating expenses.
Stephen Coleman also failed to disclose two prior civil judgments for breaches of contract involving non-payment of promissory notes and a short-term loan. The judgments were filed against him and his companies in 1997, according to the state complaint.
Stephen Coleman had requested a hearing to contest the claims made by the state, but after more than a year, withdrew his request in November, citing a Justice Department and Postal Service investigation ‽arising out of and or related to these proceedings,” according to a notice filed by Larry Coleman with the state.
This past week, the state fined Stephen Coleman and referred the case to the Missouri Administrative Hearing Commission for a hearing on whether to suspend or revoke Stephen Coleman s securities license. The hearing is set for April 16.
Other inquiries
By his own admission, Stephen Coleman is no stranger to investigations.
In a letter sent to Kitzi s office dated July 15, 2008, Stephen Coleman said he has been the subject of various inquiries.
‽There have been challenges,” he wrote. ‽The current matter with the Missouri secretary of state is unique in only one respect: The state made its allegations public. There have been many prior, private investigations. The state has investigated me on two other occasions, with no effect. The Securities and Exchange Commission has investigated me on three occasions over the past 20 years, with no effect. They look and they leave.
‽The real question is why did they come? I believe it is because we are small and, therefore, perceived to be easy prey by them or a competitor. I also believe that our consistent excellence as equity investors puzzles some folks.”
SEC spokesman John Hiney said he couldn t find any public documents confirming any past probe into Stephen Coleman or his companies. If the SEC never takes action against someone, the agency can open and close a case without any public disclosure. As far as this latest case of alleged securities fraud, Hiney said he could neither confirm nor deny any SEC investigation. Jan Diltz, a spokeswoman for U.S. Attorney Catherine Hanaway, also said she couldn t confirm nor deny any investigation into Stephen Coleman.
~Volatile manager
In 2000, the St. Louis Public School Retirement System, which, at the time, served nearly 10,000 active and retired employees, dismissed Daedalus Capital as one of its financial managers. The pension board s investment adviser, Doris Ewing, a partner with New England Pension Consultants, said Daedalus, which parlayed an $8 million investment into $62 million, was the ‽most volatile manager.”
‽Volatility is not a bad thing,” Stephen Coleman said at the time. ‽Over performance against our (S&P 500) benchmark is positive volatility.”
Stephen Coleman, along with Rick Johnson, also ran ColJon Holdings Inc., an unsuccessful group of companies funded primarily with venture capital money from the school pension fund. The ColJon investments were at the center of months of turmoil on the pension board, ultimately resulting in several lawsuits among trustees and against Stephen Coleman. The American Arbitration Association found the retirement system was entitled to recoup $2.8 million from ColJon companies.
