Stuart Frost, founder of a San Juan Capistrano-based startup incubator that’s helped launch more than 20 tech-focused firms since 2010, was ordered to pay $16 million to investors after losing an arbitration case, the Business Journal has learned.
His firm, Frost Data Capital, has also quietly wound down its incubator.
The closure comes amid an acrimonious and previously unreported lawsuit filed earlier this year by investors in funds overseen by Frost Data, whose roster of clients included a number of companies focused on big data, artificial intelligence, predictive analytics and the Industrial Internet.
The ruling of arbitrator Stephen J. Sundvold, a retired Superior Court Judge, was recently upheld, according to court documents obtained last week.
The ruling also required Frost to relinquish his role as fund manager for two investments funds, which burned through more than $40 million under his watch, according to court documents.
“I strongly disagree with the arbitration ruling and feel it was very unfair, but the system makes an appeal almost impossible, so I’ve decided to go down the path of trying to reach a settlement,” Frost told the Business Journal.
“The funds were fully invested a while ago and the remaining companies matured beyond the point of needing the incubator, so while the entities haven’t closed down, operations are minimal right now,” he said.
Tenants at the office property that previously held the headquarters of the incubator—a few blocks south of Mission San Juan Capistrano—told the Business Journal that Frost Capital is no longer there.
The company’s website has also expired.
It appears that at least seven of the 25 startups launched in the incubator are still operational, including OspreyData Inc. in San Juan Capistrano, and ThinkIQ based at Techspace and nearby Veracity Industrial Networks, both in Aliso Viejo.
Lawsuit
The lawsuit was filed earlier this year by investors Hollencrest Bayview Partners LP and Robert B. Wolford.
Frost allegedly violated operating and partnership agreements, paid himself unauthorized salaries in the millions, charged “excessive” incubator fees eclipsing $30,000 per month per portfolio company, and withheld that information and more from investors, according to filings from the Santa Ana courthouse.
The investors said they worried Frost was spending too much time in places like Italy and not concentrating on the investments.
Wolford, managing director of Hollencrest Securities LLC, invested in the seed fund and Frost VP Early Stage Fund II LP.
Messages for Greg Pellizzon, managing director and chief executive of Newport Beach-based Hollencrest Capital Management, were not returned.
AI Angle
Frost Data was established in 2010 with an emphasis on discovering, developing and monetizing applications using predictive analytics and artificial intelligence.
Stuart Frost moved the company in 2012 from Aliso Viejo to San Juan Capistrano with a vision to build a campus spread out in offices across the city.
He garnered his share of headlines locally and nationally and touted Fairfield, Conn.-based conglomerate GE Corp. and Mountain View-based software maker Symantec Corp. as partners and clients. It was at this time that he was given a Business Journal Innovator Award. He told the Business Journal a few years ago that he had raised $55 million from high-net-worth investors in Orange County and around the world.
“He repeatedly misled investors about the prospects of big corporate investments,” the lawsuit read.
The arbitrator’s ruling said Frost’s office displayed a whiteboard that showed 10 large corporate investors and $718 million that they were going to invest.
In reality, only $5 million was invested, the ruling said.
“There never have been any successful exits that resulted in proceeds being distributed to the investors,” Sundvold said in his ruling following arbitration proceedings earlier this year that included sworn testimony from 29 witnesses.
The arbitrator in June appointed Brian Weiss, co-founder of Force Ten Partners LLC, to manage the remaining Frost Data holdings.
Weiss declined to reveal how much money is left in these funds, citing confidentiality.
Force Ten is a Newport Beach-based financial services company that specializes in corporate restructurings, turnarounds, fund issues, and other fiduciary matters. It represented Freedom Communications in bankruptcy proceedings of the Orange County Register and oversaw the $57.5 million sale of Crystal Cathedral to the Roman Catholic Diocese.
