SEC Charges Long Island-Based Hedge Fund Manager with Fraud Involving PIPE Transactions
FOR IMMEDIATE RELEASE 2011-194
Washington, D.C., Sept. 28, 2011 — The Securities and Exchange Commission today charged a Long Island-based investment adviser with defrauding investors in hedge funds investing in PIPE transactions and misappropriating more than $1 million in client assets for his personal use.
The SEC alleges that Corey Ribotsky and his firm The NIR Group LLC repeatedly lied to investors to hide the truth that his PIPE investment and trading strategy was failing during the financial crisis. For example, Ribotsky falsely told investors that despite the adverse market conditions he could liquidate all of the PIPE investments in 36 to 48 months — a practical impossibility given the size of the investments. Meanwhile, Ribotsky misused investor money by writing checks to pay for personal services and such luxury items as a Lexus, Mercedes, and Rolex watch.
“In a classic betrayal of trust, Ribotsky stole from his investors and falsely assured them that his struggling hedge funds were thriving,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This enforcement action reflects our continuing commitment to bring to justice individuals and companies that committed fraud during the credit crisis.”
A “PIPE” transaction involves “private investment in public equity.” Microcap public companies often engage in PIPE transactions to raise capital. According to the SEC’s complaint filed in federal district court in Brooklyn, N.Y., NIR’s family of AJW Funds provided cash financing to distressed, emerging growth, and start-up microcap companies quoted on the Over-the-Counter Bulletin Board or the Pink Sheets. The AJW Funds were typically invested in 120 to 130 different companies at any given time.
The SEC alleges that beginning in July 2004, Ribotsky began siphoning assets from one of the AJW Funds he was managing through NIR. Ribotsky typically wrote checks to himself or to “cash” and then instructed NIR office employees to cash the checks at a nearby bank. They would then give Ribotsky the money. Although Ribotsky was warned by NIR’s head accountant that he could not lawfully take this money for himself, Ribotsky continued to do so anyway for the next five years.
According to the SEC’s complaint, NIR’s strategy of investing in distressed and start-up companies began to show signs of failure by mid-to-late 2007. Many of the distressed companies to which the AJW Funds had made loans were by then essentially defunct or on the verge of filing for bankruptcy. The SEC alleges that Ribotsky made false and misleading statements to investors while his hedge funds were struggling to create the illusion of success. For instance, an NIR employee — who also is charged in the SEC’s complaint — prepared an investor chart accurately showing that NIR had invested a total of $31.4 million in 57 deals for the relevant period. When Ribotsky reviewed the chart, he told the employee that “investors can’t see this” and instructed him to “change the number to something near $60 million” before sending it to investors so they would falsely see an average investment of at least $1 million per deal. Ribotsky continued to make false and misleading statements to investors even after the AJW Funds’ outside auditor had calculated that it would take decades — if possible at all — to liquidate all of the AJW Funds’ PIPE investments under NIR’s stated investment and trading strategy.
The SEC further alleges that Ribotsky used money from one group of investors to pay another group of investors in 2007 without adequately disclosing this to any of the investors. Ribotsky’s misconduct also included his failure to conduct any meaningful due diligence before selling a third party $43.2 million of AJW Funds assets in November and December 2008 — a transaction that allowed Ribotsky to book a purported “realized” gain at a critical time without his funds actually receiving any money. NIR’s offering materials and investor communications touted that NIR engages in extensive due diligence reviews before making investment decisions on behalf of the AJW Funds. The third-party purchaser soon defaulted on his payment obligations and has never paid for any of the assets.
The SEC’s complaint charges Ribotsky and NIR with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint seeks a final judgment permanently enjoining Ribotsky and NIR from future violations of the above provisions of the federal securities laws and ordering them to disgorge any ill-gotten gains plus prejudgment interest and pay monetary penalties.
The SEC’s investigation was conducted by Joseph Dever, Kenneth Byrne and Christopher Mele of the SEC’s New York Regional Office. Howard A. Fischer will lead the SEC’s litigation efforts.
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For more information about this enforcement action, contact:
George S. Canellos Director, SEC’s New York Regional Office (212) 3360-1020
David Rosenfeld Associate Director, SEC’s New York Regional Office (212) 336-0153
Joseph Dever Assistant Director, SEC’s New York Regional Office (212) 336-0058
Howard Fischer Senior Trial Counsel, SEC’s New York Regional Office (212) 336-0589
Corey Ribotsky and the NIR Group Responds to SEC Complaint Posted September 28, 2011
Roslyn, NY - After years of investigating claims of ponzi scheming and fraudulent valuation, primarily lodged by two disgruntled former employees who had been terminated for improper conduct, The NIR Group and its Managing Partner, Corey Ribotsky have been vindicated in part by the fact that the Securities Exchange Commission?'s (SEC's) long running investigation failed to make a case in support of these specious claims.
There are no claims that NIR fraudulently valued the assets of the funds or that NIR took fees that it was not entitled to take. Rather, the SEC's complaint focuses on an alleged misappropriation of approximately $1 million dollars against the backdrop of a fund that had in excess of $800 million in total assets in addition to tens of millions of dollars of fees paid to NIR.
The vast remainder of the Complaint "cherry picks" emails from 2007 and 2008 in an attempt to allege that NIR and Mr. Ribotsky mislead a very small number of investors or potential investors about the time it would take to liquidate the portfolio of the NIR funds. The SEC's complaint makes no mention of the offering memorandum given to potential investors or the risk warnings set forth in said memorandum addressing the very risks they claim are at the center of their allegations.
"I think the complaint appears to be a stretch in an attempt to justify approximately two years of time and resources poured into the investigation," says Ribotsky's lawyer and spokesperson Brad Gerstman. NIR and Ribotsky look forward to defending these allegations in court.
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