On September 28, 2011, the Securities and Exchange Commission (“SEC”) charged Corey Ribotsky, an unregistered investment adviser based in Long Island, New York, with fraud and misappropriation of more than $1 million in client assets. The SEC alleged violations under the Securities Act of 1933, Securities Exchange Act of 1934, and the Investmrent Advisers Act of 1940. The SEC filed the case in federal court in New York.
According to the complaint, Ribotsky is the sole managing member of the unregistered investment advisory firm called The NIR Group, LLC (“NIR”). Through NIR, Ribotsky managed funds in another entity known as the AJW family of hedge funds (“AJW Funds”). The AJW Funds invested in companies via the purchase of private placements of securities known as “PIPEs” or private investments in public equity for the purpose of financing micro-cap distressed, emerging-growth, and start-up companies listed on the Over-the-Counter Bulletin Board or the Pink Sheets. In exchange for the financing, the companies issued convertible debentures with attractive yields that could be converted into stock at a discounted price. The AJW Funds’ audited financial statements show that the AJW Funds’ assets increased from approximately $17 million to approximately $876 million during the period 2000 to 2007, though the SEC alleged that most of these gains were from NIR’ s write-up each year of the purported fair value of the PIPE investments in the AJW Funds’ portfolio and not from realized trading profits from converting the loans to stock and selling the stock in the market.
According to the SEC, Ribotsky illegally used the AJW Funds’ assets for his personal use. The SEC explained that, in 2004, Ribotsky personally invested in one of the AJW Funds by assigning and transferring to the fund convertible debentures from his own private investment vehicle that he had used to make similar PIPE investments. Upon investing in the AJW Funds, Ribotsky became an investor subject to the same terms and conditions as other investors.
The SEC alleged that shortly after making his personal investment Ribotsky began using the fund’s assets for his personal use by converting the debentures he had transferred into common stock, selling the stock in the open market and then transferring the proceeds to a personal bank account. According to the SEC, Ribotsky generated approximately $1,060,000 from the AJW Funds’ assets and used the money for personal purposes including luxury car payments, jewelry, and audio and computer services for his home residence. Even after NIR’s head accountant warned Ribotsky that he could not legally take this money for himself, Ribotsky told the accountant “not to worry about it” and continued to do so.
In addition, the SEC alleged that Ribotsky committed fraud by making false and misleading statements and omitting material fact in communications with investors. The SEC explained that, by mid to late 2007, NIR’s investing strategy in PIPE transactions began showing signs of failure as many of the distressed companies that the AJW Funds had made loans to were essentially defunct or near bankruptcy. In order to conceal this fact and avoid writing down losses, Ribotsky “restructured” outstanding debt by issuing new debentures to the same delinquent and nonperforming companies.
These new debentures contractually entitled the AJW Funds to more shares of the companies, and it allowed NIR to record more unrealized gains. But it also made it virtually impossible for the AJW Funds to ever fully realize these gains because there was insufficient trading volume to sell all of the shares to which the AJW Funds were entitled. Despite this fact, Ribotsky told current and prospective investors that NIR could “liquidate” or “exit” all of the AJW Funds’ PIPE investments in 36 to 48 months. Ribotsky continued to tell this to investors even after the auditor explained that it would take NIR decades, if ever, to liquidate the investments. In addition, the SEC contended that Ribotsky made other false and misleading statements about the liquidity and performance of the AJW Funds.
The SEC also alleged that Ribotsky falsified investor documents in August 2007 by instructing an employee to inflate the total amount of investor funds that was invested in various deals during the first seven months of 2007, and the employee followed Ribotsky’s instructions.
Further, the SEC alleged that Ribotsky defrauded investors by entering into a large risky transaction without first conducting adequate due diligence notwithstanding NIR’s offering materials and investor communications promising that Ribotsky would conduct due diligence. The SEC claimed that, in 2008, Ribotsky sold $43.2 million of convertible PIPE debentures from the AJW Funds in return for a series of promissory notes in order to avoid significant realized trading losses. The purchaser quickly defaulted on payment obligations but still remains in control and possession of the debentures. The SEC contended that this transaction was not in the best interests of the AJW Funds investors because Ribotsky knew that the Purchaser’s character and reputation for honesty were suspect , and he failed to conduct due diligence on the purchaser before executing the transaction. Ribotsky has not disclosed this information to investors.
Finally, the SEC alleged that Ribotsky misled investors when he formed the “Master Fund” – a fund created by combining an AJW off-shore fund with an AJW on-shore fund. According to the SEC, Ribotsky combined the two funds in order to pay redemption requests by investors in the on-shore fund because the on-shore fund lacked available cash. The SEC explained, however, that Ribotsky did not disclose this purpose to the investors. Rather, Ribotsky told investors that merging the two funds was in the best interest of the funds and would ease administrative burdens.
The SEC is seeking to permanently enjoining the defendants from violating securities laws, disgorgement of the ill-gotten gains with prejudgment interest, and civil monetary penalties.
Call Wittenberg Law at (877) 352-2010 if you would like to discuss this matter further.
