DD Support Board and Research Team

[nodummy]

NIR GROUP - Feds eye penny-stock hedge fund fraud

03/25/2011 01:11:00 AM EDT -- Long Island Business News (NY)

http://dialog.newsedge.com/portal.asp?site=2007100814443105593225&searchfolderid=pg2007100814522209759333&block=default&related=off&action=sitetopics&mode=realtime&portlet=ep&criteria=%5Btopic%3DNACEO%3E300%5D&searchID=731189&datetime=%5Bt-minus%3D7%5D&hdlaction=story&storyid=%5Bstoryid=RjzTsUlQTM9limF9NhEBQCQYNNJkZ0WIEdstnQOWYINKOcK_MLJN9-U_v8ERurOUPwPLNDq7OKsi8EcDm-e6xQ**%5D&rtcrdata=on&epname=NACEO&;

When things were good, investors in a Roslyn-based hedge fund were thrilled to earn anywhere from 13 to 50 percent in annual returns during the first decade of the firm's existence. But like so many of the investment devices that came crashing to the ground in the fall of 2008, so did NIR Group. That year, NIR stopped returning its investors' principal, and its fast rise and even quicker fall attracted the attention of federal regulators.

Now eight months after a former analyst of NIR Group pled guilty to securities fraud, sources say federal investigators have turned up the heat on the troubled hedge fund and its manager, Corey Ribotsky.

The feds have questioned people with ties to NIR Group and its collection of funds, including New Millenium Capital Partners II and AJW Offshore, about whether it paid kickbacks to outsiders as part of a scheme to inflate the value of its holdings, which the firm claimed had eclipsed $780 million.

Just last week, lawyers for a Houston-based company called Systems Evolution opposed a motion to dismiss a suit it filed claiming NIR Group and Ribotsky, its fund manager, engaged in a massive fraud by manipulating penny-stock companies and made "sham transactions designed to improve its own stock trading prospects to the detriment of the companies themselves."

Last July, former NIR Group investment analyst Daryl Dworkin pled guilty to three counts of securities fraud and conspiracy to commit securities fraud. He admitted to misleading investors by "making materially false statements and material omissions" regarding assets held in NIR's funds, according to a letter sent to NIR investors from the U.S. Attorney's Office. Dworkin reportedly told federal investigators that he was acting at the direction of NIR's senior management.

But two months ago, Ribotsky sent a letter to NIR investors denying his firm did anything wrong. NIR suspended the return of its investors' principal investments toward the end of 2008 and Ribotsky told investors the move was necessary to preserve the fund. Ribotsky and his attorney, Jordan Hershman of Bingham McCutheon in Boston, didn't return calls requesting comment.

George Canellos, the director of the Securities and Exchange Commission's New York regional office, said he couldn't comment on whether his team is conducting an investigation or on any aspects of his agency's investigations.

NIR and its affiliated funds have been sued by about a dozen small companies, including Positran Corp., Itronics, Learning Priority and avVaa World Health Care Products, claiming the hedge fund manipulated stock prices at the expense of the companies it invested in.

In October, the SEC charged a California company called Ingen Technologies, in which NIR was once the largest investor, with securities fraud for its role in a kickback scheme to manipulate the volume and price of Ingen's stock and illegally generate stock sales.

NIR invests its hedge-fund assets primarily in small public companies whose shares are valued at $1 or less through privately negotiated deals called PIPEs (private investments in public equities). In return for money the hedge fund puts into the companies, as it did with Systems Evolution, NIR was often given notes that could later be converted into stock at a discounted rate. Investigators are looking to see if anyone with financial ties to some of these public companies received compensation for helping NIR to inflate the values of its investments.

Neil Kaufman, an attorney with Lake Success-based Abrams Fensterman, said he looked into NIR Group for clients who were short on cash and looking for alternative funding sources. But because NIR's method of deal making, called "toxic convertibles," usually ravaged companies' stock prices, Kaufman said he stayed away.

Kaufman said toxic convertible financing is a last resort for officers of small, troubled public companies that are running out of money but think, if they had just a bit more, they could pull through and continue to execute their business plans. Once the toxic convertible deal is complete, however, the stock price is so low, and the value of the shares so diluted, that companies often fall into financial ruin. Kaufman said all of the companies suing NIR Group should have known about the potentially negative effects a toxic convertible deal could have on their finances.

The SEC has been cracking down on hedge funds lately in an effort to better scrutinize a largely unregulated industry. Currently, hedge funds don't have any filing requirements with the SEC, a spokesman with the commission said. But the SEC is currently developing a regulatory framework for hedge fund advisers and managers like Ribotsky and NIR.

Under the new rule, Ribotsky would have to register with the SEC and disclose to the commission his firm's organizational structure and the exact type of investments it makes. The rules are necessary, according to the SEC, because the many institutions and individuals that invest money in hedge funds need some kind of protection.

Kaufman said Ribotsky and the team at the NIR Group are smart because they were still making money when stock prices were going down.

And legal or not, Ribotsky's business strategy seemed to work quite well for both himself and his investors - one fund earned a 54 percent annual rate of return since 1999, according to company literature. In 2008, its worst year, NIR investors still earned a healthy 13 percent, while Ribotsky himself made an estimated $35 million in fees, according to a report by dealbreaker.com.

"NIR complained that they were being singled out and persecuted by the SEC, but I don't know about them being singled out," Kaufman said. "They were one of the leaders of that pack of toxic investors."

http://dialog.newsedge.com/portal.asp?site=2007100814443105593225&searchfolderid=pg2007100814522209759333&block=default&related=off&action=sitetopics&mode=realtime&portlet=ep&criteria=%5Btopic%3DNACEO%3E300%5D&searchID=731189&datetime=%5Bt-minus%3D7%5D&hdlaction=story&storyid=%5Bstoryid=RjzTsUlQTM9limF9NhEBQCQYNNJkZ0WIEdstnQOWYINKOcK_MLJN9-U_v8ERurOUPwPLNDq7OKsi8EcDm-e6xQ**%5D&rtcrdata=on&epname=NACEO&;