Invest1 publisher3 min readPublished
SEC says Croft & Frost's owners diverted at least $53 million of the $64 million their note funds raised
SEC regulators allege Croft & Frost's owners diverted at least $53 million of $64 million raised from more than 230 note investors. About half the money went back to the Chattanooga accounting firm's own payroll, so buyers of similar private notes should ask where the cash goes once it is raised.
The Investor · Invest desk
What happened
- The SEC filed a civil complaint on Sept. 11 accusing Croft & Frost owners Jonathan Frost and Paul Croft of securities fraud, three years after their Chattanooga accounting firm collapsed.
- The complaint says the pair raised about $64 million from more than 230 investors between January 2021 and September 2023 and used at least $53 million for purposes other than those investors were told.
- Nearly $33 million of investor money was sent back to the accounting firm to cover its salaries and commissions, according to the lawsuit.
- Frost has consented, subject to court approval, to a permanent securities bar plus fees and a civil penalty whose amounts the court will set.
- Salesman Matthew Dira kept selling after September 2022 emails suggested new investors' money was needed to repay earlier ones, regulators allege.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- decision Advisers vetting a sponsor-run note fund have to trace whether proceeds can flow back to the sponsor's own business, since stated purposes did not stop about 83% of this raise going elsewhere.
- cost The 230-plus investors carry the loss until a court sizes the disgorgement and civil penalties the SEC is seeking from all three men.
- exposure Sales staff at small private issuers can be charged in their own right, with Dira facing an unregistered-broker count and a proposed bar from working with brokers, dealers or advisers.
Against the whole raise, the payroll flow comes to about 52% of the $64 million [1]. The SEC puts the owners' direct personal benefit at about $11 million, or 17%, and says investors were never told the pair were being paid directly [8][2]. "Croft used these payments to acquire multiple exotic cars such as a Maserati and a Ferrari," the lawsuit said, "and personal residences in Chicago and Miami." [9]
If the two figures do not overlap, together they cover $44 million of the at least $53 million the agency says went somewhere other than where investors were told [7]. The complaint's other uses describe a business short of cash: exorbitant interest and fees on loans that kept the tax practice open, and Ponzi-style payments to existing investors [7].
Spread across the 33 months from January 2021 to September 2023, the funds took in about $1.9 million a month [5]. With more than 230 investors, the average stake was under $278,000 [4]. At that pace, the almost $2.1 million Frost had recently raised when Croft asked about it in an April 2022 text was about one month of inflow [10][6]. "Frost responded, 'Yes but that's for us bro :),'" the lawsuit said, "to which Croft replied with the love emoji." [11]
Several of the notes did not say how proceeds would be used, yet investors were told their money would fund small-business loans, real estate or a hydrogen power plant [5]. That allows two readings of where the gap was. If the blank use-of-proceeds line was the problem, a buyer who insisted on the clause would have been protected. I think the evidence points the other way. The SEC measures the $53 million against what investors were told, so the diverted money includes cash raised for a named purpose, and the complaint spans seven funds [3][4].
The thesis fails on the fund-by-fund split. If most of the $53 million came from the notes that left the purpose blank, the missing clause was the gap after all. The news report does not say which of the seven funds those were [4].
The salesman's share was small. Matthew Dira's at least $500,000 in salary and commissions from 2021 to 2023 is about 0.8% of the raise, and he managed other sales employees as well as selling [15][14][8]. The SEC accuses him of acting as an unregistered broker on top of the 1933 and 1934 Act counts it brings against all three men [16].
Frost has already pleaded guilty to three federal financial crimes in a parallel criminal case [12]. SEC spokesperson David Ausiello said by email that the agency would not comment beyond its public filings, and Frost's lawyer, Lee Davis, said he would not comment outside court [18].
What to watch
- Whether the court approves Frost's consent deal and what civil penalty it sets.
- Whether Croft and Dira settle or contest the securities-law and broker counts.
- Whether disgorgement recovers assets bought with investor money, and how much.