SEC v. THE NIR GROUP, LLC; COREY RIBOTSKY; and DARYL DWORKIN, Eastern District of New York (Sept. 28, 2011) — Complaint
raw: 3 World Financial Center - Suite 400 lYN OFFICI!
3 World Financial Center - Suite 400 lYN OFFICI! (E.D.N.Y. Sept. 28, 2011)
Exhibit of The NIR Group, LLC, et al.
summary
Corey Ribotsky and The NIR Group, LLC, with assistance from employee Daryl Dworkin, committed securities fraud by misappropriating over $1 million in client assets, fabricating performance data to inflate portfolio values from $31.4M to nearly $60M, falsely claiming PIPE investments could be liquidated in 36–48 months despite their illiquidity, and orchestrating a $43.2M sham sale to an uncreditworthy buyer, all while collecting $126M in fees based on deceptive reports.
paragraph
The SEC charged The NIR Group, LLC, Corey Ribotsky, and Daryl Dworkin with securities fraud for misappropriating over $1 million from the AJW Qualified Partners Fund to fund Ribotsky’s personal luxury expenses, including cars and jewelry. Ribotsky falsely told investors that the fund’s PIPE investments in micro-cap stocks—many trading at fractions of a penny with negligible volume—could be liquidated within 36–48 months, despite auditor warnings that liquidation would take decades or be impossible; he also orchestrated a $43.2 million fraudulent asset sale to an uncreditworthy buyer who defaulted and never paid. Dworkin aided the fraud by falsifying investor reports, changing a $31.4 million investment total to nearly $60 million, while NIR collected $126 million in fees based on these deceptive valuations between 2000 and 2007.
narrative
Corey Ribotsky, through his unregistered investment advisory firm The NIR Group, LLC, defrauded investors in the AJW family of hedge funds by misappropriating over $1 million in client assets for personal use, including luxury cars and jewelry, and directing employees to cash checks made out to himself or 'cash.' He falsely assured investors that the fund’s massive PIPE investments in distressed, thinly traded micro-cap stocks—many quoted at fractions of a penny on the Pink Sheets—could be liquidated within 36 to 48 months, despite auditor calculations showing it would take decades or be impossible. In November and December 2008, Ribotsky orchestrated a $43.2 million sham sale of fund assets to a financially unstable buyer with over $270,000 in judgments and no meaningful assets, who signed promissory notes that were never paid, yet retained control of the assets. Ribotsky and NIR conducted no due diligence on the buyer, violating their own touted due diligence standards, and concealed the default. Dworkin, an NIR employee, falsified investor reports at Ribotsky’s direction, inflating the fund’s total investments from $31.4 million to nearly $60 million to mask poor performance. Despite these deceptions, NIR collected approximately $126 million in management and performance fees between 2000 and 2007 based on inflated, unrealized gains. The SEC alleges that Ribotsky and NIR violated multiple securities laws, including anti-fraud provisions and registration requirements, while Dworkin pleaded guilty to aiding and abetting the fraud.
Classified unregistered-securities(confidence 100%). EDGAR detection: forms Form D/S-1· recall 41% / precision 30%. detection rule →
Statutes
15 U.S.C. § 78j(b)15 U.S.C. § 78t(e)15 U.S.C. § 80b-9(e)15 U.S.C. § 80b-6(4)15 U.S.C. § 77t(b)15 U.S.C. § 78u(d)15 U.S.C.§80b-915 U.S.C. § 77t(d)15 U.S.C. § 80b-2(11)15 U.S.C. § 80b15 U.S.C.§ 77q(a)15 U.S.C. § 80-9(e)17 C.F.R. § 275.206(4)17 C.F.R. § 240.10b-517 C.F.R. §240.1Section 17(a) of the Securities ActSection 20( d) of the Securities ActRule 10b-5
Parties
Securities and Exchange CommissionTHE NIR GROUP, LLCCOREY RIBOTSKYDARYL DWORKIN
Keywords
ribotskyajwnirofthefundsinvestorsinvestmentfundpipe investmentsfunds'false misleadingpipeinvestorstatementsinvestments
Extracted insights
Dollar amounts 39
- $876.00M $876 million $100M–$1B
- $407.00M $407 million $100M–$1B
- $126.00M $126 million $100M–$1B
- $124.00M $124 million $100M–$1B
- $89.00M $89 million $10M–$100M
- $60.00M $60 million $10M–$100M
- $58.60M $58.6 million $10M–$100M
- $43.20M $43.2 million $10M–$100M
- $43.20M $43.2 Million $10M–$100M
- $37.00M $37 million $10M–$100M
- $31.40M $31.4 million $10M–$100M
- $28.00M $28 million $10M–$100M
Entities 4
- person COREY RIBOTSKY
- person DARYL DWORKIN
- company over $1 million of client assets from the ajw qualified partners, llc fund
- company THE NIR GROUP, LLC
Triples 8
- Ribotsky misappropriated over $1 million of client assets from the AJW Qualified Partners, LLC Fund
- Ribotsky made false and misleading statements to investors about the AJW Funds' performance and liquidity in 2007, 2008, and 2009
- Ribotsky told investors that NIR could liquidate all AJW Funds' PIPE investments in 36 to 48 months
- NIR acquired contractual rights to billions of shares in non-performing companies quoted at fractions of a penny on the Pink Sheets
- Ribotsky wrote checks to himself or to 'cash' and had employees cash them for personal use
- Ribotsky ignored warnings from NIR's head accountant that he could not lawfully take client money
- Auditor calculated it would take decades, if ever, to liquidate AJW Funds' PIPE investments under NIR's strategy
- Ribotsky purported to sell $43.2 million of AJW Funds' assets to a third-party in November and December 2008
Text layers
Extracted body text (75,832c)
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GEORGE S. CANELLOS
Regional Director , ,
I .
- .
'::' :.../
Attorney for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office BROOK
3 World Financial Center - Suite 400 l YN OFFICI!
New York, New York 10281
(212) 336-0589 (Howard A. Fischer, Senior Trial Counsel)
Email: [email protected]
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK BIANCO, J.
------------------------------------------------------------------------J(
SECURITIES AND EXCHANGE COMMISSION, BOYLI:. M.Je
11 Civ. _ _ _ __
Plaintiff,
COMPLAINT
- against-
ECF Case
THE NIR GROUP, LLC; COREY RIBOTSKY;
and DARYL DWORKIN, Jury Trial Demand
Defendants.
------------------------------------------------------------------------J(
Plaintiff Securities and Exchange Commission ("Commission"), for its complaint against
defendants The NIR Group, LLC ("NIR"), Corey Ribotsky ("Ribotsky"), and Daryl Dworkin
("Dworkin") (collectively, "Defendants"), alleges:
SUMMARY
1. This action involves the misconduct of an unregistered investment adviser who (i)
misappropriated over $1 million of client assets and (ii) made materially false and misleading
statements to investors in an attempt to conceal the poor performance of his investment and
trading strategy during the recent financial crisis. From at least 2004 to 2009, Ribotsky,
operating through his Long Island, New York unregistered investment advisory firm, NIR,
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defrauded investors in the $876 million AJW family of hedge funds ("AJW Funds"), which
invest in PIPE transactions (private investment in public equity).
2. From July 2004 to June 2009, Ribotsky misappropriated for his personal use over
$1 million of assets from one of the AJW Funds he was managing through NIR - the AJW
Qualified Partners, LLC Fund ("AJW Qualified Fund"). Ribotsky liquidated some of AJW
Qualified Fund's assets and misused the proceeds by writing checks to pay for personal services
and to purchase luxury items, including cars and expensive jewelry. Ribotsky also wrote checks
to himself or to "cash" and then instructed NIR office employees to cash the checks at a nearby
bank and 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.
3. In addition to misappropriating client assets, Ribotsky made false and misleading
statements to investors in 2007,2008 and 2009 about the AJW Funds' performance and liquidity.
In particular, Ribotsky falsely told investors that, despite the adverse market conditions ofthat
time, NIR could liquidate - that is, fully convert to cash - all of the AJW Funds' PIPE
investments in 36 to 48 months. This,howevet, was a practical impossibility under the
investment and trading strategy that NIR touted, given the size of the AJW Funds' PIPE
investments and the adverse market conditions at the time.
4. Ribotsky made these false and misleading statements even after the AJW Funds'
outside auditor met with him to disc:usst.heresuhs oftheir audit procedures, in which the auditor
calculated that it would take decades, if ever, to liquidate all ofthe AJW Funds' PIPE
investments under NIR's stated investment and trading strategy. This was due, in part, to the
fact that by January 2008, NIR had acquired, in many instances, the contractual right to billions
of shares of stock in non-performing, distressed companies that were quoted at mere fractions of
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a penny mostly on the Pink Sheets (now OTe Link), a private electronic inter-dealer quotation
and trading system used in the over-the-counter market. These issuers had very little, if any,
trading volume in relation to the billions of shares that the AJW Funds were contractually
entitled to receive.
5. Furthermore, in November and December 2008, Ribotsky purported to sell $43.2
million ofthe AJW Funds' assets to a third-party (the "Purchaser") in an apparent effort to show
investors that NIR was continuing to generate cash (or realized gains) in the fourth quarter of
2008. The Purchaser, however, did not pay cash for the AJW Funds' assets; rather, he signed
"promissory notes" agreeing to pay the full $43.2 million purchase price in cash within 3-6
months. The Purchaser defaulted on the promissory notes and never paid for the assets, yet he
continues to own and control the assets and has not returned them to the AJW Funds.
6. Ribotsky and NIR defrauded investors by failing to conduct any due diiigence on
the Purchaser or his entities before committing the AJW Funds to the transaction. Ribotsky and
NIR failed to conduct any due diligence despite the fact that 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. Had Ribotsky conducted any
meaningful due diligence, as he had told investors he would do, Ribotsky would have learned
that entering into a multi-million dollar transaction with the Purchaser and his entities was not in
the best interests ofthe AJW Funds becausethePurchaserand-pis-entities were not creditworthy
counter-parties. For example, they had no meaningful assets or money to pay for the assets they
were acquiring from the AJW Funds and they had a number of unpaid debts, judgments and liens
against them.
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7. Ribotsky further defrauded investors by instructing Dworkin, an NIR employee,
to mislead investors by, among other things, falsifying certain documents that were sent to
investors. In particular, in August 2007, Dworkin prepared an investor chart accurately showing
that NIR had invested a total of $31.4 million in 57 deals for the relevant period. After Ribotsky
reviewed the chart, he told Dworkin that "investors can't see this" and he instructed Dworkin to
"change the number to something near $60 million" before sending it to investors, apparently
because Ribotsky wanted investors to see an average investment of at least $1 million per deal.
Dworkin followed Ribotsky's instructions and changed the figure to $58.6 million on the chart.
The falsified chart was subsequently sent to investors.
8. Ribotsky also defrauded investors by using money from one group of investors to
pay another group of investors without adequately disclosing this to any of the investors. In May
2007, Ribotsky told investors in an AJW off-shore fund and an AJW on-shore fund that NIR was
merging the two funds to create an AJW "master fund." Ribotsky, however, did not disclose to
the investors that the reason he was merging the two funds was to gain access to the cash in the
off-shore fund to pay outstanding investor redemptions in the on-shore fund. At the time, the on
shore fund lacked sufficient cash, or the ability to generate sufficient cash, to pay all of the
outstanding investor redemptions.
VIOLATIONS OF THE FEDERAL SECURITIES LAWS
9. By virtue ofthe conduct alleged in this complaint, Ribotsky and NIR, directly or
indirectly, singly or in concert, have engaged in and are engaged in transactions, acts, practices,
or courses of business that constitute violations of Section 17(a) of the Securities Act of 1933
("Securities Act") [15 U.S.C. §§ 77q(a)], Section lOeb) ofthe Securities Exchange Act of 1934
("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.lOb-5] thereunder, and
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Sections 206(1), 206(2), 206(4) ofthe Investment Advisers Act of 1940 ("Advisers Act") [15
U.S.C. §§ 80b-6(1), (2) and (4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
10. By virtue ofthe conduct alleged herein, Dworkin is liable (a) pursuant to Section
20(e) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78t(e)], for
aiding and abetting NIR's and Ribotsky's violations of Section lOeb) of the Exchange Act [15
U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; and (b) pursuant to Section
209(d) of the Investment Advisers Act ("Advisers Act") [15 U.S.C. § 80b-9(e)], for aiding and
abetting NIR's and Ribotsky's violations of Section 206(4) of the Advisers Act [15 U.S.C. §
80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
11. The Commission brings this action pursuant to the authority conferred upon it by
Section 20(b) ofthe Securities Act [15 U.S.C. § 77t(b)], Section 21(d)(1) ofthe Exchange Act
[15 U.S.C. § 78u(d)(1)], and Section 209 of the Advisers Act [15 U.S.C.§80b-9].
12. The Commission seeks a judgment (a) permanently enjoining Defendants from
committing future violations of the above provisions of the federal securities laws; (b) ordering
Defendants to disgorge any ill-gotten gains with prejUdgment interest thereon; (c) ordering
Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15
U.S.C. § 77t(d)], Section 21 (d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)], and Section 209
of the Advisers Act [15 U.S;C §80b-9J; and (d) ordering such other arId further relief the Court
may deem just and proper.
JURISDICTION AND VENUE
13. This Court has jurisdiction over this action and venue is proper in the Eastern
District of New York pursuant to Sections20(b) and 22(a) of the Securities Act [15 U.S.c. §§
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77t(b) and 77v(a)], Sections 21(d) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and 78aa],
and Sections 209 and 214 of the Advisers Act [15 U.S.c. §§ 80b-9 and 80b-14]. The
Defendants, directly and indirectly, have made use ofthe means and instrumentalities of
interstate commerce, or of the mails, in connection with the transactions, acts, practices and
courses of businesses alleged herein. A substantial portion of the events comprising Defendants'
fraudulent conduct occurred in the Eastern District of New York. NIR maintains its principal
place of business and offices in this District; Ribotsky and Dworkin reside in this District; and
several investors in the AJW Funds reside in this District. Furthermore, Ribotsky
misappropriated client assets in this District and made material misrepresentations and omitted to
state material facts when communicating with investors and potential investors while working
out ofNIR's offices in'this District.
DEFENDANTS
14. NIR is an unregistered investment adviser located in Roslyn, New York. NIR
was organized as a limited liability company in November 1999 and is controlled by Ribotsky,
who is the firm's sole managing member. For a brief period in 2006, NIR was registered with
the Commission as an investment adviser, but NIR withdrew its investment adviser registration·
just a few months after registering with the Commission. At all times relevant to the allegations
in the complaint, NIR provided investment advisory and management services to the AJW Funds
through various wholly-owned affiliated entities that serve as managing members of the
individual funds.
15. Ribotsky, age 40, resides in Old Westbury, New York. Ribotsky is the sole
managing member ofNIR and controls all ofthe operations and activities ofNIR. Ribotsky does
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not hold any securities licenses. Ribotsky attended Brooklyn Law School and NYU Business
School for a period of time, but he did not graduate or receive a degree from either institution.
16. Dworkin, age 42, resides in Syosset, New York. Dworkin was an NIR analyst
from September 2002 through March 2003. He later returned to work at NIR as an analyst from
April 2004 through April 2008. On July 7, 2010, Dworkin pled guilty in U.S. v. Daryl Dworkin
CR1 0-515 (EDNY) to criminal charges, including conspiracy to commit securities fraud, arising
out of his role in the conduct alleged in this Complaint.
FACTS
General Background
The AJW Funds
17. The AJW Funds are a group of private investment funds that invest in PIPE
transactions. The AJW Funds were formed in 1999 and were managed by Ribotsky through NIR
and its affiliate entities. According to the AJW Funds' audited financial statements for the
period 2000 to 2007, the AJW Funds' assets increased from approximately $17 million in 2000
to approximately $876 million in 2007. The last audited financial statements for the AJW Funds
are for year-end December 31, 2007. The AJW Funds' independent auditor has not issued an
audit report with respect to the AJW Funds' 2008,2009, and 2010 year-end financial statements,
and NIR has not sent investors any audited financial statements for those years.
18. The AJW Fu.'lds were originally comprised of AJW Partners, LLC, New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, and AJW Offshore, Ltd.
19. In June 2007, Ribotsky combined AJW Qualified Partners LLC (an on-shore
fund) and AJW Offshore, Ltd. (an off-shore fund) to form a master/feeder fund named the AJW
Master Fund, Ltd. ("Master Fund").
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20. In October 2008, Ribotsky suspended all investor redemption payments and
formed a new set of AJW funds. The new funds required investors to agree to longer lock-up
periods for redemptions in exchange for lower management and performance fees. The new
funds are New Millennium Capital Partners III, LLC, AJW Partners II, LLC, AJW Qualified
Partners II, LLC, AJW Offshore II, Ltd. and AJW Master Fund II, Ltd. In forming the new
funds, which employed the same PIPE investment strategy, NIR effectively transferred a portion
of the existing AJW fund's assets to the new AJW funds. NIR sent existing investors new
offering documents and subscription agreements for the new AJW funds. Existing investors
were asked to choose whether they wanted to remain in the existing AJW funds or transfer their
investments into the new AJW funds. Most investors elected to transfer their investments into
the new AJW funds.
21. On March 30 and 31, 2011, NIR informed investors in the AJW Funds that NIR
was going to unwind and liquidate the AJW Funds. On April 5, 2011, the Grand Court of the
Cayman Islands ("Grand Court") placed the voluntary liquidation of the off-shore Master Fund
(which accounts for approximately 70% of all of the AJW Funds' assets) under the Grand
Court's supervision. On May 30, 2011, the Grand Court appointed an independent third-party
liquidator for the Master Fund.
NIR's PIPE Investment and Trading Strategy
22. Ribotsky, acting through NIR a..'1d its affiliated entities, provides investment
advisory and management services to the AJW Funds. The AJW Funds were typically invested
in 120-130 different companies at any given time. Ribotsky touted the PIPE strategy in investor
publications as NIR's "own unique proprietary investment strategy and investment process."
The AJW Funds provided cash financing to micro-cap distressed, emerging-growth, and start-up
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companies quoted on the Over-the-Counter Bulletin Board ("OTC-BB") or the Pink Sheets.
Most of the companies in which NIR invested the AJW Funds' money trade for pennies per
. . .
share, or for fractions of a penny, in very thinly traded markets. Some of the companies do not
trade at all. NIR purportedly provided the companies financing in "tranches" that it claimed
extended over 2-4 years.
23. The AJW Funds typically received convertible debentures that paid an annual
interest rate of 4% to 12% and had a default penalty of 15% that applied to unpaid principal and
interest at the time of maturity. The outstanding principal and interest under the debentures were
purportedly convertible into the borrower's common stock at a discount (ranging from 35% to
85%) to the stock's market price at the time of conversion. Because the contractual terms ofthe
financing provided that the debt would always be converted at a discount to the share's market
prices at the time of conversion, NIR recorded a "paper profit" (as unrealized gains) when the
PIPE deals closed, and NIR accreted the unrealized gains over a 90 day period.
·24. NIR sought to convert the paper profits (unrealized gains) to cash income
(realized gains) by selling the discounted shares in the open market. The "convert and sell"
trading aspect ofNIR's investment strategy allowed it to record the cash income received from
selling stock in the open market as realized gains on the AJW Funds' books and records and
financial statements.
25. Ribotsky represented to investors that NIR could "liquidate" or "exit" alLofthe
AJW Fund's PIPE investments (i.e., fully convert the debentures to stock and sell the stock)
within 36 to 48 months.
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NIR's Performance History And Management Fees
26. According to the AJW Funds' audited financial statements for the years ending
2000 to 2007, NIR recorded a total of $407 million in returns during that period. Most of the
returns, however, were from NIR's write-up each year ofthe 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.
27. NIR earned management fees equal to 2% of the AJW Funds' assets and
performance fees equal to 20% of the AJW Funds' supposed annual profits, which consisted of
realized and unrealized gains. According to the AJW Funds' audited financial statements, NIR
earned approximately $126 million in management and performance fees during the period 2000
through 2007. Of this amount, approximately $37 million was from management fees and
approximately $89 million was from performance fees.
28. As discussed above, the AJW Funds' independent auditor has not issued an audit
report with respect to the AJW Funds' 2008,2009, and 2010 year-end financial statements, and
NIR has not sent investors audited financial statements for those years.
Failure of NIR's Investment and Trading Strategy
29. By mid to late 2007, NIR's strategy of investing in distressed and start-up
companies began to show signs offailure. Many of the distressed companies that the AJW
Flli'1ds had made loans to were by then essentially defunct or on the verge of filing for
bankruptcy. They were no longer engaging in any meaningful business operations, had "going
concern" reports from auditors, were delinquent in their periodic and other filings,and were
trading, if at all, primarily on the Pink Sheets for mere fractions of a penny. Accordingly, the
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companies that the AJW Funds had loaned money to in prior years were now defaulting on their
loan and conversion obligations in 2007.
30. In order to avoid the possibility that NIR would need to write-down the fair value
of the AJW Funds' investments in delinquent and non-performing companies, Ribotsky chose to
"restructure" the outstanding debt by issuing new debentures to the same delinquent and non
performing companies. Ribotsky rolled the outstanding principal, interest, and default penalties
into new debentures and negotiated greater conversion discounts for the issuers' shares.
Although this restructuring strategy contractually entitled the AJW Funds to a greater number of
shares, for most of the companies, there was little, if any, trading volume for their stock by late
2007. By restructuring the loans in this manner, NIR ended up recording more and more
unrealized gains for the investments and avoided having to disclose to investors what otherwise
would have been an ever-growing number of defaulted loans held by the AJW Funds.
31. The practical effect of the debt restructurings, however, was that it would be
difficult or impossible for NIR fully to "monetize" these PIPE investments - that is, fully convert
the unrealized gains to realized gains - because there was insufficient trading volume to sell the
billions of shares that the AJW Funds were now contractually entitled to under the terms of the
restructured debentures.
32. Despite the fact that by 2007 it was unlikely that NIR could ever fully convert and
liquidate most of the PIPE investments, NIR was still reporting double digit performance returns
for the AJW Funds. Ribotsky and NIR were able to do so by restructuring bad debt, which
resulted in the recording of more and more unrealized gains. NIR continued to earn management
and performance fees that were calculated, in part, by reference to the period-over-period
increase in unrealized gains for the AJW Funds' now illiquid PIPE investment portfolio. For
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example, during the first six months of2008, NIR earned approximately $7.5 million in
management fees.
The Funds' Independent Auditor Tells Ribotsky It Will Take
Decades, if Ever, to Liquidate the Funds' PIPE Investments
Under NIR's Stated Investment and Trading Strategy
33. In connection with the audit of the AJW Funds' 2007 year-end financial
statements, the AJW Funds' independent auditor (the "Auditor") analyzed the amount of time it
would take NIR to liquidate the PIPE investments under NIR's stated investment and trading
strategy. Based on several different audit procedures that the Auditor performed in early 2008,
the Auditor calculated that it would take NIR decades, if ever, to liquidate the AJW Funds' PIPE
investments. The Auditor met with Ribotsky several times over the course of January, February
and May 2008 to discuss the results of their analyses and provided him with their audit work
papers detailing their analyses.
34. One ofthe audit procedures that the Auditor conducted was an "aging analysis" of
the AJW Funds' PIPE investment portfolio. This analysis concluded that it would take NIR 25
years to liquidate just one-half of the PIPE investment portfolio and an unspecified amount of
time beyond 25 years to liquidate the remaining half. In fact, the Auditor's work papers note that
that actual number of years it would take to liquidate the PIPE investments was even greater
because the aging analysis assumed that NIR was the only party selling stock in the thinly traded
markets for these securities, 'wpich would not be the case. The aging analysis was based on 2007
market conditions, including the companies' share price on December 31,2007 and the average
daily trading volume over a six month period leading up to that date.
35. In another analysis, called a "turnover analysis," the Auditor calculated that it
would take NIR approximately 11 years to liquidate the entire PIPE investment portfolio. This
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analysis was based on NIR's 2007 rate of turnover for the PIPE investment portfolio. The
Auditor calculated that NIR liquidated approximately 9% ofthe PIPE investment portfolio in
2007 and, at that rate, it would take approximately 11 years to liquidate the entire PIPE
investment portfolio.
36. The Auditor also performed an analysis ofthe AJW Funds' top 25 PIPE
investments to determine how long it would take NIR to liquidate these investments, which
accounted for 62% of the total value of the AJW Funds' PIPE investment portfolio. The Auditor
calculated that, as of December 31,2007, only 3 out ofthe 25 investments could be liquidated in
4 years or less. The Auditor calculated that it would take tens and, in some cases, hundreds of
years to liquidate most of the PIPE investments under NIR's stated investment and trading
strategy. In fact, the Auditor calculated that 2 PIPE investments would take over 700 years to
liquidate and that 3 PIPE investments were in companies that had no trading activity at all for
their common stock. This meant that it was unlikely that these PIPE investments could ever be
liquidated in the open market.
37. For example, one of the AJW Funds' largest PIPE investments was a $6.8 million
principal investment in a company called Modem Technologies ("MODC"), which was a Pink
Sheet stock that had been delisted from the OTC-BB on October 25,2006 for failing to file
required financial reports. The Auditor's analysis revealed that, as of December 31,2007, NIR
was carrying this inv€stment on the AJW Funds' books at a discounted fair value of$16.8
million, which was based on the AJW Funds' contractual right to convert the· outstanding loan
amount into 27 billion shares ofMODC stock, which was quoted for $0.001. per share on the
Pink Sheets as of December 31, 2007. Based on the six month average daily trading volume,
which was just 145,295 shares per day, the Auditor calculated that it would take NIR
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approximately 751 years to fully convert and sell out of this investment in order to liquidate
(i.e., fully convert to cash) under NIR's stated investment and trading strategy.
38. The following is a summary of the Auditor's calculations for the number of years
it would take NIR to liquidate the AJW Funds' Top 25 PIPE investment under NIR's stated
investment and trading strategy:
AJW Funds
Top 25
12/3112007
Company Total Shares Price Per Share Est. Years to
(Convertible) Fully
Convert/Sell
MHGI 188,133,397,544 $0.00019 95
TXTG 4,716,667 $0.75 20
DLAV 12,206,262,745 $0.00388 4
EPCG 133,626,458,246 $0.00019 137
CCNG 233,423,636,923 $0.00013 711
MODC 27,165,483,400 $0.001 751
CYBL 853,979,379 $0.0255 0
ACTK Not Traded Not Traded Not Traded
CYDF 3,419,062,087 $0.00631 8
WTVN 25,886,054,761 $0.00113 27
GLBT 194,157,196,923 $0.00013 43
GRWW 3,060,022,063 $0.007 32
PFEH 50,004,640,632 $0.00038 96
CYSG 133,357,891,154 $0.00013 140
MGWL Not Traded Not Traded Not Traded
DIBZ Not Traded Not Traded Not Traded
ASVN 57,297,025,161 $0.00031 12
AVTI 4,175,406,116 $0.00419 8
SSHS 24,153,329 $0.30 99
BNYN 10,424,152,107 $0.00138 10
ABPH 3,354,056,010 $0.004 20
INSN 103,916,252,747 $0.00013 41
IGAI 24,337,922,632 $0.00038 31
ITRO 4,741,356,611 $0.00263 1
ADMH 4,108,354,114 $0.003 8
14
--- page 15 ---
The Fraudulent Conduct
Misappropriation of Fund Assets
39. Sometime after forming the AJW Funds in 1999 and 2000, Ribotsky and a
business partner decided to set up a private company to make personal PIPE investments for
themselves. They formed a private investment vehicle called Equilibrium Equity, LLC
("Equilibrium") which made the same type of PIPE investments that the AJW Funds were
making. That is, they made loans to micro-cap companies in exchange for debentures that
allowed the loans to be converted into the issuers' stock. Sometime after forming Equilibrium,
Ribotsky bought out his partner. Ribotsky then became the sole member of Equilibrium and,
therefore, the sole owner of the convertible debentures that constituted Equilibrium's sole assets.
40. In July 2004, Ribotsky decided to personally invest in one of the funds he was
managing - the AJW Qualified Fund. However, instead of investing in the fund by making a
payment to the AJW Qualified Fund, Ribotsky chose to make an "in-kind" investment by
assigning and transferring to the AJW Qualified Fund all of the assets (convertible debentures)
that Ribotsky owned through his private company, Equilibrium. Ribotsky transferred all of
Equilibrium'S debentures, which he valued at $581,525, to the AJW Qualified Fund in July 2004.
At that point, Ribotsky became an investor in the AJW Qualified Fund under the same terms and
conditions as the other investors in the fund and he relinquished all of his direct ownership
interest in the debentures which he previously oVffi€d through Equilibriu.TJ1.
41. Almost immediately after making his personal investment in the AJW Qualified
Fund, Ribotsky began to misappropriate assets from that fund for his personal use. From August
2004 through June 2009, Ribotsky converted the debentures that he had transferred from
Equilibrium to the AJW Qualified Fund into the issuers' common stock. Ribotsky then arranged
15
--- page 16 ---
to have the stock delivered to an Equilibrium brokerage account instead of an AJW Qualified
Fund brokerage account. Ribotsky then sold the stock in the open market and transferred the
cash proceeds to an Equilibrium bank account instead of an AJW Qualified Fund bank account.
In total, between August 2004 and June 2009, Ribotsky generated approximately $1,060,000 in
cash proceeds in the Equilibrium brokerage and bank accounts by converting debentures and
selling stock that belonged to the AJW Qualified Fund. Ribotsky misappropriated nearly all of
this money for his personal use, as described below.
42. Between June 2006 and April 2008, Ribotsky withdrew $155,500 in cash from
Equilibrium'S bank account by writing checks to himself or to cash. Ribotsky instructed office
employees to take the checks to a local bank, cash them, and give him the money. In addition,
between August 2004 and March 2008, Ribotsky misappropriated additional money from the
sale of stock that belonged to the AJW Qualified Fund and its investors as follows: (i) writing
checks totaling $24,681 for Lexus and Mercedes car payments; (ii) writing a check to a jewelry
store for $15,750 to purchase a Rolex watch; (iii) withdrawing $19,000 in cash from ATM
machines; (iv) spending $23,000 for audio and computer services for his home residence; and
(v) transferringnearly $815,000 to various personal bank accounts or accounts under his control
that were not accounts that belonged to AJW Qualified Fund.
43. At some point in 2004, NIR's head accountant told Ribotsky that Ribotsky could
---not take for himself the money in the Equilibrium accounts that came from the conversion of
debentures and the sale of stock that belonged to the AJW Qualified Fund and its investors.
Ribotsky told the head accountant "not to worry about it" and he continued to take the money for
himself.
16
--- page 17 ---
False and Misleading Statements and Omissions of Material Fact
Time Required to Liquidate the AJW Funds' PIPE Investments
44. In 2007 and 2008, Ribotsky told investors and prospective investors that NIR
could "liquidate" or "exit" all ofthe AJW Funds' PIPE investments in 36 to 48 months.
Ribotsky continued to tell this to investors even after the Auditor showed Ribotsky their analyses
calculating that it would take NIR decades, if ever, to liquidate all ofthe AJW Funds' PIPE
investments under NIR's stated investment and trading strategy.
45. . Specifically, Ribotsky made the following false and misleading statements to
investors:
(a) October 21,2008 email from Ribotsky to investor
Investor: "How much in proceeds could you realistically have raised if
you had to convert as much as you could and tried to sell the converted
shares?"
Ribotsky: "[W]e could if needed sell the entire portfolio in 36 months
getting the current N AV. If we were to want to fire sale it, the time would
be less, but we may not get the exact discounted market value we carry the
investments at."
(b) March 30, 2008 email from Ribotsky to investor, attaching Due
Diligence Ouestionnaire signed by Ribotsky
Q: Describe your strategy (in as much detail as possible):
A: N.I.R. specializes in private placements in public small
capitalization companies ... PIPE's are structured as convertible preferred
securities, or secured convertible debt that converts to common stock, Full
Liquidation could take from 1 to 4 or more years.
(c) July 17,2008 email from Ribotsky to investor
Ribotsky: "Vie usually look at the total sale of the whole portfolio if we
were going to sell it all in approximately 36 to 48 months."
(d) October 16, 2008 letter signed by Ribotsky to investors
Ribotsky: "[I]t is generally expected to take approximately 36 months or
longer to successfully sell the securities of all of the portfolio companies
held by the [AJW Funds]."
17
--- page 18 ---
(e) October 1, 2007 email from Ribotsky to investor
Investor: "How liquid is your portfolio? How fast can you liquidate 50%,
75% and 100%?"
Ribotsky: "As you know unlike most we always have 15-25% in cash at
all times ... [and] [t]o liquidate the remaining 75% in total in a complete
liquidation of the fund we would say approximately 36 months." .
46. Ribotsky's statements above representing the length oftime it would take NIR to
liquidate the AJW Funds' portfolio of PIPE investments were materially false and misleading in
light ofthe market conditions at the time. The statements were false because by late 2007 most
of the AJW Funds' PIPE investments were convertible into billions of shares of stock in
companies that traded for mere fractions of a penny and had little, if any, trading volume in
relation to the billions of shares that the AJW Funds were contractually entitled to receive.
Therefore, it would take decades, if ever, for NIR to convert and sell the stock in those
companies in order to liquidate the AJW Funds' PIPE investments under NIR's stated
investment and trading strategy.
47. In fact, as of December 31, 2007, at least seven companies in which the AJW
Funds had invest(!d did not trade at all and, therefore, there was no trading market for NIR to sell
the stock of these companies. The Auditor met with Ribotsky in early 2008, and showed him
their analyses calculating that the length of time if would take NIR to liquidate the AJW Funds'
PIPE investments under NIR's stated investment and trading strategy was nowhere close to the
36 to 48 month period Ribotsky was telling investors. Therefore, Ribotsky knew, or was at least
reckless in not knowing, that his statements to investors about the length of time it would take
NIR to liquidate the PIPE investments were false and misleading at the time he made them.
48. Ribotky's statements were also misleading because Ribotsky omitted material
information when making the statements to investors. In order to make Ribotsky's statements to
investors not misleading, Ribotsky should have told investors, at a minimum, that the 36 to 48
18
--- page 19 ---
month exit period he was representing was not possible under the market conditions existing in
late 2007 and 2008. By failing to disclose this relevant and material information when
communicating with investors, Ribotsky misled investors into believing that, despite the adverse
market conditions of late 2007 and 2008, NIR could still fully liquidate the AJW Funds' assets in
36 to 48 months.
Additional False and Misleading Statements and Omissions of Material Fact
49. In addition to the false and misleading statements Ribotsky made to investors in
late 2007 and 2008 about the time it would take to liquidate the AJW Funds' assets, Ribotsky
made other false and misleading statements in late 2007,2008, and 2009 about the AJW Fund's
liquidity and performance.
50. The following statement made by Ribotsky was false and misleading:
October 21, 2008 email from Ribotsky to investor
Investor: "What are the proceeds from converted stocks you have sold this month
of October?"
Ribotsky: "We typically sell $5 million to $15 million a month. This month
[October] has been a little slower while September was a little better."
51. Ribotsky's answer to this investor's question was false and misleading because
the AJW Funds' monthly stock sales proceeds for.September and October 2008 were nowhere
near the $5 to $15 million monthly range that Ribotsky referenced in his email. In fact, the AJW
Funds' monthly stock sales proceeds for September and October 2008 were just $277,561 and
----$131,802, respectively. Moreover, from February to October 2008, the AJW Funds' monthly
proceeds from selling stock never exceeded $1 million.
52. The investor to whom Ribotsky sent this false and misleading statement
subsequently invested his IRA savings in the AJW Funds in early 2009.
19
--- page 20 ---
53. The following statement made by Ribotsky was false and misleading:
November 7-8,2007 email from Ribotsky to investor
Ribotsky: "But in this case [ABPH] the liquidity of the deal is within the time
frame [2-4 years] we have allotted for it ...."
54. Ribotsky's statement was false and misleading based on the 2007 market data
available to him at the time he made the statement. According to the Auditor's subsequent
calculations, which were based on essentially the same market data, the exit period for the
particular investment Ribotsky was referring to in his email - ABPH - was approximately 20
years.
55. The following statement made by Ribotsky was false and misleading:
March 30, 2008 email from Ribotsky to investor, attaching Due Diligence
Questionnaire signed by Ribotsky
Q: "What is the longest term held security in the fund and why?"
A: "5 years but extremely small positions that continue to be slowly being
[sic] sold into the market."
56. This statement was false and misleading because Ribotsky knew at the time he
made it that the AJW Funds had a number of PIPE investments that were older than 5 years. In
fact, the AJW Funds had PIPE investments in at least 15 companies that dated as far back as
2000,2001 and 2002. These investments were still being carried on the AJW Funds' books,
presumably because they were illiquid and NIR could not fully convert and sell out of these
positions under NIR's stated investment and trading strategy.
57. The following statement made by Ribotsky was false and misleading:
December 10, 2008 email from Ribotsky to investor
Investor: "When I inquired a few months ago, you ha4 not yet had any defaults or
bankruptcies in your portfolio but indicated that is always a possibility. Have
there been any defaults or bankruptcies since?"
Ribotsky: "No defaults or no bankruptcies."
20
--- page 21 ---
58. Ribotsky's statement was false and misleading because several companies in
which the AJW Funds were invested had, at the time, already defaulted in 2008. On June 13,
2008, Ribotsky was copied on an internal NIR email advising him that 2 portfolio companies
were in default. The email read: "PFMS ... defaulted as of 4/18 [and] RKLC ... defaulted as of
5/2." Therefore, Ribotsky knew that at least two companies had defaulted in 2008 when he told .
the investor there were "no defaults." In addition, another internal NIR email, dated August 21,
2008, from an NIR analyst lists at least 3 companies that were in default: "Companies in default
are ADMH, RKLC, UNVC." Although Ribotsky is not listed as a recipient of this email, the
email was circulated within NIR and was based on the research of an NIR employee. Therefore,
this information was certainly available to Ribotsky when he told the investor that there were no
defaults in 2008. This is the same investor who invested his IRA savings in the AJW Funds in
early 2009.
59. The following statements made by Ribotsky were false and misleading:
(a) June 30, 2008 email from Ribotsky to investor
Investor: "Can you please tell me what the status [is of the AJW Funds'
2007 audited financial statements] and why this is taking longer than
expected ?"
Rihotsky: "Unfortunately they [the Auditor] have taken longer this year
and with our switch to the master/feeder structure have to do some
additional audit procedures. FUrther to that there are new aUditing
standards for all funds that are creating some backlog throughout the
auditing community."
Investor: "We know that dealing with an external auditor can take more
time then [sic] expected. I just want to check if this is the only reason for
the delay." .
Rihotsky: "Yes this is the only reason for the delay."
(b) January 14, 2009 email from Ribotsky to investor
Investor: "Why was the audit for 2007 not issued until August 14, 2008?"
Rihotsky: "The 07 audit was delayed due to personnel changes at the
auditor."
21
--- page 22 ---
60. Ribotsky's answers were false and misleading because the delay in the 2007 audit
of the AJW Funds' financial statements was due to the Auditor's concerns about whether NIR
was properly recording the fair market value of the PIPE investments. The delay was not due to
personnel changes at the Auditor or to the switch to the master feeder fund structure, as Ribotsky
told the investors. In response to the Auditor's valuation concerns, and at the Auditor's request,
NIR retained a third-party valuation expert in June 2008 to review the methodology that NIR
was using to record the fair market value of the PIPE investments. The third-party valuation
expert completed its report in July 2008. The Auditor subsequently concluded its audit work and
issued an unqualified audit report for the AJW Funds' year-end December 31, 2007 financial
statements in August 2008. Ribotsky's failure to mention the real reason for the audit delay-
that the Auditor had concerns about whether NIR was properly recording the fair market value of
the PIPE investments and, therefore, required additional audit procedures - rendered Ribotsky's
answers to the investors' questions about the audit delay false and misleading.
61. The following statement made by Ribotsky was false and misleading:
March 16, 2008 newsletter signed by Ribotsky to investors
"In terms of [Q4 2007] deal highlights, the following are examples of two
companies that we added to our portfolio ... The first company is a developer of
environmental process technology for photochemical, silver, and water recycling.
.. The second portfolio company is focused on becoming the content
management system for social networks and small business markets."
62. Ribotsky's statement was false and misleading because the two companies
described in the newsletter were not "added to [the] portfolio." Rather, they were existing
portfolio companies that NIR simply provided additional financing to during the fourth quarter
of 2007. The ability of NIR to continue making investments in new companies was important to
investors because it demonstrated to investors that, despite the adverse market conditions in late
2007 and 2008, there was still a market for NIR's PIPE investment strategy.
22
--- page 23 ---
63. The false and misleading statements and omissions of material facts alleged above
were made in the offer or sale and in connection with the purchase or sale of securities because
they were made to prospective and existing investors, many of whom made subsequent
investments in the AJW Funds. For example, Ribotsky sent the March 30,2008 email and
attached due diligence report, described above, to a prospective overseas investor. After
receiving the email and due diligence report, the overseas investor invested $25 million in the
AJW Funds in May 2008. Moreover, Ribotsky sent the July 17,2008, October 21,2008,
December 10,2008, and January 14,2009 emails, described above, to the same prospective
investor who, after receiving the emails, invested $122,256 of his IRA money with the AJW
Funds in early 2009.
64. In addition, Ribotsky sent the October 16, 2008 letter, described above, to existing
investors asking them to invest in newly-created AJW funds. The first sentence of the October
16,2008 letter states: "We [NIR] are ... offering you interests in a newly-organized entity...."
NIR sent existing investors private placement memoranda and subscription agreements
concerning the newly-created AJW funds. Existing investors who chose to invest in the newly
created AJW funds did so by executing subscription agreements that represented their portion of
ownership in the new AJW funds.
Falsification of Investor Documents
65. Ribotskyfb.."ther defrauded investors by instructing Dworkin, an NIR employee,
to mislead investors by, among other things, falsifying certain documents that were sent to
investors. In particular, in August 2007, Ribotsky instructed Dworkin to inflate the total amount
of investor money that NIR had invested in 57 deals during the first seven months of 2007
(through July 31,2007). Dworkin initially prepared the chart accurately showing that NIR had
23
--- page 24 ---
invested a total of $31.4 million in the 57 deals for the relevant period. Dworkin then sent the
chart by email to Ribotsky on August 13,2007.
66. After Ribotsky reviewed the chart that Dworkin had prepared, Ribotksy stated
"investors can't see this" and he instructed Dworkin to "change the number to something near
$60 million" before sending it to investors, apparently because Ribotsky wanted investors to see
an average investment of at least $1 million per deal. Dworkin followed Ribotsky's instructions
and changed the figure to $58.6 million on the chart. The next day, August 14,2007, Ribotsky
sent the falsified chart by email to an investor. The falsified chart was also sent to at least one
other investor on October 15,2007.
The $43.2 Million Sale of Fund Assets
67. By the fourth quarter of 2008, Ribotsky knew that NIR's investment and trading
strategy could not generate enough cash from selling stock to keep up with mounting investor
redemption requests and that NIR was, in fact, starting to incur trading losses. The AJW Funds
suffered nearly $3.9 million in realized trading losses in the month of October 2008 alone. Faced
with the reality that his investment strategy would result in significant fourth quarter 2008
realized trading losses - and likely year-end realized trading losses as well - Ribotsky entered
into a series of transactions in which he purported to sell some ofthe AJW Funds' assets (PIPE
investments in the form of convertible debentures) that NIR valued at $43.2 million to the
Purchaser and certain entities controlled by the Purchaser.
68. In November and December 2008, Ribotsky (on behalf of the AJW Funds) and
the Purchaser (on behalf of his entities) entered into nine separate transactions in which the AJW
Funds purportedly sold $43.2 million of convertible PIPE debentures to the Purchaser's entities.
The debentures that Ribotsky purported to sell the Purchaser had a face value of$12.6 million,
which represented the AJW Funds' principal investment in the companies that issued the
24
--- page 25 ---
debentures. The Purchaser, however, did not pay cash for the debentures; rather, he signed a
series of "promissory notes" agreeing to pay the full purchase price in cash within 3-6 months.
The Purchaser also executed a "personal guarantee" promising to personally pay the full
purchase price for the debentures in the event his entities could not do so.
69. These transactions, however, were not in the best interests ofthe AJW Funds and
its investors, and Ribotsky did not perform any due diligence with respect to the Purchaser or his
entities before entering into the transactions. Ribotsky entered into the transactions in the hopes
of being able to hide the trading losses that the AJW Funds were incurring in the fourth quarter
of2008. In fact, by recording the proceeds from the debenture transactions as "sales" on the
books and records of the AJW Funds, NIR recorded $18 million in net realized gains on the 2008
AJW Funds' books and records. Without the proceeds from the debenture transactions, however,
the 2008 AJW Funds' books and records would have reflected net realized losses of $3.4 million.
70. The Purchaser defaulted on his payment obligations and to this date, he has not
paid for the debentures. The Purchaser and his entities have control and possession of the
debentures. Ribotsky has not commenced any legal action on behalf of the AJW Funds to seek
payment for the debentures or their return to investors. Nor has Ribotskydisclosed to the
investors that he arranged for the AJW Funds to sell $43.2 million oftheir assets, that the
Purchaser defaulted on his payment obligations, and that the AJW Funds no longer have
71. Ribotsky and NIR defrauded investors by failing to conduct any due diligence
with respect to the Purchaser and his entities before entering into the multi-million dollar
transaction with them. Ribotsky and NI.R failed to conduct any due diligence despite the fact
25
--- page 26 ---
that NIR's offering materials and investor communications touted the "extensive" due diligence
that NIR would conduct before making investment decisions on behalf of the AJW Funds.
72. For example, Ribotsky and NIR made the following disclosures to investors
relating to NIR's due diligence protocols:
(a) NIR Quarterly Newsletter signed by Ribotsky to investors,
October 2008
"NIR does extensive due diligence and credit work on all transactions."
(b) AJW Qualified Partners II, LLP Private Placement Memorandum,
October 2008
"The Investment Manager believes that the first and most essential step to
successful investing is the identification and uncovering of as much
infonnation as possible about an investment opportunity. This process is
facilitated by the extensive primary research conducted by the Investment
Manager on businesses and industries."
(c) NIR Investor Presentation, (undated)
"Extensive due diligence is perfonned before any investment is made ....
[t]he process entails detailed descriptions and analysis of all pertinent
financial, legal, and accounting infonnation both past and present."
73. Despite these, and other similar, due diligence related representations made to
investors, Ribotsky and NIR did not conduct any due diligence with respect to the Purchaser or
his entities before entering into the transactions with them in November and December 2008.
Ribotsky and NIR did not request or receive any documentation to assess the creditworthiness of
the Purchaser and his entities, or to verify that the Purchaser and his entities had any meaningful
assets or the financial means to pay for the debentures.
74. Ribotsky's prior business dealings with the Purchaser should have placed
Ribotsky on notice, ifhe was not already, that entering into the multi-million dollar transaction
with the Purchaser was not in the best interest of the AJW Funds. Prior to entering into the
debenture transactions in November and December 2008, Ribotsky knew, and in fact he had told
others, that the Purchaser's character and reputation for honesty were suspect. For example, in
26
--- page 27 ---
an email to a co-worker, dated April 30, 2008, Ribotsky wrote: "[The Purchaser] is a thief [sic]
and crook." In another email, dated February 19,2008, Ribotsky wrote: "[The Purchaser] has a
checkered past and now his reputation preceeds [sic] him." Ribotsky also knew, prior to
November and December 2008, that the Purchaser paid bribes to an NIR employee in order to
secure investments from the AJW Funds in start-up companies that the Purchaser was
representing. Ribotsky learned about these bribes in September 2008, which was two months
before Ribotsky entered into the transactions to sell AJW Fund assets to the Purchaser.
75. Had Ribotsky or NIR performed any meaningful due diligence with respect to the
Purchaser and his entities, as Ribotsky told investors NIR would do, Ribotsky would have known
that entering into a multi-million dollar transaction on behalf oftheAJW Funds with the
Purchaser and his entities clearly was not in the best interest of the AJW Funds. In particular,
Ribotsky would have known that the Purchaser had a long history of personal and business credit
problems and outstanding judgments and that neither the Purchaser nor his entities had any
meaningful assets or the financial means to pay for the debentures.
76. In'fact, the Purchaser had less than $30,000 in the bank account of his entities at
the time of the transactions in November and December 2008. Although at one point tl;1e
Purchaser gave Ribotsky a $700,000 check towards the debenture purchases, the Purchaser
subsequently stopped payment on the check before it was cashed. As of the date on the check,
April 12, 2009, t..ltere was less than $500 in the ba.TIk accotL'lt on which the check was written.
The Purchaser was also personally in debt and had limited financial means and credit. At the
time, there were mUltiple collection matters and judgments against the Purchaser for over
$270,000 in unpaid telephone, credit card, and department store bills. Even a cursory review of
publicly available records would have shown that the collectability of the $43.2 million from the
27
--- page 28 ---
Purchaser and his entities was highly unlikely within the 3-6 month payment period under the
terms promissory notes, if ever.
77. Moreover, after Ribotsky and the Purchaser entered into the last of the
transactions on December 30, 2008, Ribotsky retained a private investigator to conduct a
background check into the Purchaser. The investigator sent Ribotsky a detailed report on
January 4,2009 that, among other things, raised multiple red-flags about the Purchaser and his
entities. In particular, the report listed the Purchaser's poor financial condition and the several
outstanding collection matters and judgments against him and his entities. In fact, the very first
page of the report cautioned Ribotsky as follows:
This memorandum provides a rather disturbing background report on [the
Purchaser].... The information on [the Purchaser] was so disturbing to us that we
went to extra measures to verify these.data and to assure ourselves that all this
negative information was indeed applicable to the subject and not the result of a
confused identity. We are comfortable with the accuracy of this report but leave
it to you to decide on how to proceed in any business dealings here.
78. The report is dated January 4,2009 - just days after Ribotsky closed the last
debenture transactions with the Purchaser on December 30, 2008.
Ribotsky Misled Investors When Forming the Master Fund
79. By 2007, NIR's investment and trading strategy was not generating enough cash
income (realized gains) to pay mounting investor redemption requests. Faced with a lack of cash
to pay all of the outstanding investor redemption requests, Ribotsky paid the redemptions using
other investors' money.
80. In June 2007, Ribotsky combined an AJW off-shore fund with an AJW on-shore
fund by creating a new "master/feeder" fund - the Master Fund. The AJW on-shore fund and the
AJW off-shore fund were the only shareholders in the Master Fund. Pursuant to the
28
--- page 29 ---
reorganization, all or substantially all of the assets of both the on-shore and the off-shore funds
were transferred to the Master Fund in exchange for shares of the Master Fund.
81. . At the time Ribotsky merged the on-shore and off-shore funds, there was $39
million in outstanding investor redemption requests in the on-shore fund that were payable in
June and September 2007. However, there was only ·$13 million in cash in the. on-shore fund to
meet these pending redemption requests. During that same period, there was $124 million in
cash in the off-shore fund, but only $28 million in outstanding investor redemption requests in
that fund. Faced with a lack of available cash and the inability to generate sufficient cash by
converting and selling out of the PIPE investments, Ribotsky decided to merge the on-shore and
off-shore funds so that he could use the cash in the off-shore fund to pay the outstanding
redemptions in the on-shore fund.
82. Ribotsky, however, did not disclose to investors in the on-shore and off-shore
funds the real reason why he was merging the funds to create the Master Fund. Rather, Ribotsky
misleadingly told investors that the reason he was merging the funds was because a master
feeder fund structure was inthe best interest ofthe investors in both funds. In a letter to
investors, dated May 7, 2007, Ribotsky stated that the transition by merger to a "master-feeder
fund structure" was "in the best interest ofthe [funds]." He further stated that the merger will
provide for a "larger pool of assets from which to draw," "will be better able to take advantage of
available investment opportllnities and provide increased liquidity," and will "ease the
administrative burden on the [funds]." At a minimum, in order to make his statements to
investors not misleading, Ribotsky should have disclosed the fact that he was merging the two
funds so that he could use the cash in the off-shore fund to pay the outstanding investor
redemptions in the on-shore fund.
29
--- page 30 ---
FIRST CLAIM FOR RELIEF
Violations of Section 17(a) of the Securities Act
(NIR and Ribotsky)
83. Paragraphs 1 through 82 are re-alleged and incorporated by reference as if fully
set forth herein.
84. NIR and Ribotsky, directly or indirectly, singly or in concert, in the offer or sale
of securities by the use of means or instruments of transportation or communication in interstate
commerce or by use of the mails: (a) employed devices, schemes or artifices to defraud; (b)
obtained money or property by means of untrue statements of material fact, or omitted to state a
material fact necessary in order to make statements made, in light of the circumstances under
which they were made, not misleading; and/or (c) engaged in transactions, practices, or courses
of business which operate or would operate as a fraud or deceit upon the purchaser.
85. NIR's and Ribotsky's false and misleading statements and omissions were
material because, among other reasons, the misrepresented and omitted facts were important to
prospective and existing investors when making investment decisions concerning the AJW
Funds.
86. By reason of the activities described herein, and in particular the false and
misleading statements and omissions alleged above, NIR and Ribotsky violated Section 17(a) of
the Securities Act [15 U.S.c. §§ 77q(a)].
SECOND CL~A...!M FOR :RELIEF
Violations of Section 10(b) of the Exchange Act and Rule 10b-5
(NIR and Ribotsky)
87. Paragraphs 1 through 86 are re-alleged and incorporated by reference as if fully
set forth herein.
88. NIR and Ribotsky, directly or indirectly, singly or in concert, in connection with
30
--- page 31 ---
the purchase or sale of securities by use of means or instrumentalities of interstate commerce, or
of the mails, or ofthe facilities of a national securities exchange, with scienter: (a) employed
devices, schemes or artifices to defraud; (b) made untrue statements of a material fact or omitted
to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; and/or (c) engaged in acts,
, practices, or courses of business which operate or would operate as a fraud or deceit upon other
persons.
89. NIR's and Ribotsky's false and misleading statements and omissions were
material because, among other reasons, the misrepresented and omitted facts were important to
prospective and existing investors when making investment decisions concerning the AJW
Funds.
90. By reason of the activities described herein, and in particular the false and
misleading statements and omissions alleged above, NIR and Ribotsky violated Section 1O(b) of
the Exchange Act [15 U.S.C. § 78j(b)] and Rule lOb-5 [17 C.F.R. § 240.10b-5] thereunder.
THIRD CLAIM FOR RELIEF
Violations of Sections 206(1) and 206(2) of the Advisers Act
(NIR and Ribotsky)
91. Paragraphs 1 through 90 are re-alleged and incorporated by reference as if fully
set forth herein.
92. NIR and F..ibotsky at all relevant times were acting as investment advisers to the
AJW Funds within the meaning of Section 202(11) of the Advisers Act [15 U.S.C. § 80b-2(11)].
93. NIR and Ribotsky, directly or indirectly, singularly or in concert, by use of the
mails or means and instrumentalities of interstate commerce, while acting as investment
advisers: (a) with scienter employed devices, schemes or artifices to defraud any client or
31
--- page 32 ---
prospective client; andlor (b) engaged in transactions, practices, or courses of business which
operated as a fraud or deceit upon any client or prospective client.
94. As investment advisers to the AJW Funds, NIR and Ribotsky owed the AJW
Funds fiduciary duties of utmost good faith, fidelity, and care to make full and fair disclosure to
them of all material facts concerning the AJW Funds - including any conflicts or potential
conflicts of interests - as well as the duty to act in the AJW Funds' best interests, and not to act
in their own interests to the detriment of the AJW Funds.
95. NIR and Ribotsky breached their fiduciary duties to the AJW Funds, engaged in
fraudulent conduct and engaged in a scheme to violate Sections 206(1) and 206(2) ofthe
Advisers Act [15 U.S.C. §§ 80b-6(1), (2)] by misappropriating approximately $1 million from
the AJW Qualified Fund, as described above.
96. By reason of the activities described herein, NIR and Ribotsky violated Sections
206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1), (2)].
FOURTH CLAIM FOR RELIEF
Violations of Section 206(4) of the Advisers Act and Rule 206(4)-8
(NIR and Ribotsky)
97. Paragraphs 1 through 96 are re-alleged and incorporated by reference as if fully
set forth herein.
98. NIR and Ribotsky, while acting as investment advisers to pooled investment
vel"tides, the AJW Fu..'1ds, directly or i..'ldirectly, by use ofth.e mails or means or instrumentalities
of interstate commerce: (a) made untrue statements of material fact or omitted to state a material
fact necessary to make the statements made, in the light of the circumstances under which they
were made, not misleading to any investor or prospective investor in the pooled investment
vehicles; andlor (b) engaged in any acts, practices, or courses of business that were fraudulent,
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--- page 33 ---
deceptive, or manipulative with respect to any investor or prospective investor in the pooled
investment vehicles.
99. NIR's and Ribotsky's false and mIsleading statements and omissions alleged
above were material because, among other reasons, the misrepresented and omitted facts were
important to prospective and exiting investors when making investment decisions concerning the
pooled investment vehicles.
100. NIR and Ribotsky violated Section 206(4) ofthe Advisers Act [15 U.S.C. § 80b
6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8] by knowingly, recklessly or
negligently making the materiill misrepresentations and omissions alleged above.
101. By reason of the activities described herein, NIR and Ribotsky violated Section
206(4) ofthe Advisers Act [15 U.S.C. § 80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. §
275.206(4)-8].
FIFTH CLAIM FOR RELIEF
Aiding and Abetting Violations of
Section lOeb) ofthe Exchange Act and Rule IOb-5
(Dworkin)
102. Paragraphs 1 through 101 are re-alleged and incorporated by reference as if fully
set forth herein.
103. NIR and Ribotsky, in connection with the purchase and sale of securities, directly
and indirectly, by the use ofthe means and instrumentalities of interstate commerce or ofthe
mails, knowingly or recklessly (a) have employed devices, schemes and artifices to defraud; (b)
have made untrue statements of material fact and have omitted to state material facts necessary
in order to make the statements made, in the light of the circumstances under which they were
made, not misleading; (c) and/or have engaged in acts, practices and courses of business which
operate as a fraud and deceit upon investors.
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--- page 34 ---
104. Dworkin knowingly provided substantial assistance to NIR and Ribotsky in the
commission of these violations.
105. By reason of the activities described, Dworkin aided and abetted NIR's and
Ribotsky's violations of Section IO(b) of the Exchange Act [15 U.S.C. §§78j(b)] and Rule lOb-5
thereunder [17 C.F.R. §240.1 0~-5].
SIXTH CLAIM FOR RELIEF
Aiding and Abetting Violations of
Section 206(4) of the Advisers Act and Rule 206(4)-8
(Dworkin)
106. . Paragraphs 1 through 105 are re-alleged and incorporated by reference as if fully
set forth herein.
107. NIR and Ribotsky, as investment advisers, made untrue statements of material
facts and omitted to state material facts necessary to make the statements made, in light of the
circumstances under which they were made, not misleading, to any investor or prospective
investor in pooled investment vehicles; and NIR and Ribotsky otherwise engaged in acts,
practices, or courses of business that are fraudulent, deceptive, or manipulative with respect to
any investor or prospective investor in the pooled investment vehicle.
108. Dworkin knowingly provided substantial assistance toNIR and Ribotsky in the
commission of these violations.
109. By reason of the activities described herein, Dworkin aided and abetted NIR's and
Ribotsky's violations of Section 206(4) ofthe Advisers Act [15 U.S.C. § 80b-6(4)] and Rule
206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
34
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PRAYER FOR RELIEF
WHEREFORE, the·Comrnission respectfully requests a Final Judgment:
I.
Pennanently enjoining NIR and Ribotsky, their agents, servants, employees, attorneys,
and all persons in active concert or participation with them who receive actual notice of the
injunction by personal service or otherwise, and each of them, from future violations of Section
17(a)ofthe Securities Act [15 U.S.C.§ 77q(a)], Section lOeb) of the Exchange Act [15 U.S.C. §
78j(b)] and Rule lOb-5 [17 C.F.R. § 240.lOb-5] thereunder, Sections 206(1),206(2), and 206(4)
of the Advisers Act [15 U.S.C. §§ 80b-6(1), (2) and (4)] and Rules 206(4)-8 thereunder [17
C.F.R. § 275.206(4)-8].
II.
Pennanently enjoining Dworkin, his agents, servants, employees and attorneys and all
persons in active concert or participation with him who receive actual notice of the injunction by
personal service or otherwise, and each of them, from violating and aiding and abetting
violations of Section lOeb) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule lOb-5 thereunder
[17 C.F.R. § 240.lOb-5], and Section 206(4) of the Advisers Act [15 U.S.C. §§ 80b-6(4)] and
Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
III.
Ordering NIR and Ribotsk-y, on a joint ai"id several basis, and Dworkin to disgorge any
ill-gotten gains received from their violative conduct alleged in this complaint, and to pay
prejudgment interest thereon.
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IV.
Ordering NIR and Ribotsky to pay civil money penalties pursuant to Section 20(d) of the
Securities Act [15 U.S.C. § 77t(d)], Section 21(d)(3) ofthe Exchange Act [15 U.S.c. §
78u(d)(3)], and Section 209 of the Advisers Act [15 U.S.C. § 80b-9]; and ordering Dworkin to
pay civil money penalties pursuant to Section 21(d)(3) ofthe Exchange Act [15 U.S.C. §
78u(d)(3)] and Section 209(e) of the Advisers Act [15 U.S.C. § 80-9(e)].
V.
Granting such other and further relief as the Court may deem just and proper.
Dated: New York, NY
September 28,2011
~s~~---
Regional Director
Attorney for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
3 World Financial Center - Suite 400
New York, New York 10281
(212) 336-0589 (Fischer)
Email: [email protected]
Of Counsel:
David Rosenfeld
Joseph Dever: ID-9589; [email protected]
Howard Fischer: HF-8582; [email protected]
Kenneth Byrne: KB-9376; [email protected]
36OCR text (75,832c · gpumon-ocr-api · 90% conf)
--- page 1 ---
GEORGE S. CANELLOS
Regional Director , ,
I .
- .
'::' :.../
Attorney for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office BROOK
3 World Financial Center - Suite 400 l YN OFFICI!
New York, New York 10281
(212) 336-0589 (Howard A. Fischer, Senior Trial Counsel)
Email: [email protected]
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK BIANCO, J.
------------------------------------------------------------------------J(
SECURITIES AND EXCHANGE COMMISSION, BOYLI:. M.Je
11 Civ. _ _ _ __
Plaintiff,
COMPLAINT
- against-
ECF Case
THE NIR GROUP, LLC; COREY RIBOTSKY;
and DARYL DWORKIN, Jury Trial Demand
Defendants.
------------------------------------------------------------------------J(
Plaintiff Securities and Exchange Commission ("Commission"), for its complaint against
defendants The NIR Group, LLC ("NIR"), Corey Ribotsky ("Ribotsky"), and Daryl Dworkin
("Dworkin") (collectively, "Defendants"), alleges:
SUMMARY
1. This action involves the misconduct of an unregistered investment adviser who (i)
misappropriated over $1 million of client assets and (ii) made materially false and misleading
statements to investors in an attempt to conceal the poor performance of his investment and
trading strategy during the recent financial crisis. From at least 2004 to 2009, Ribotsky,
operating through his Long Island, New York unregistered investment advisory firm, NIR,
--- page 2 ---
defrauded investors in the $876 million AJW family of hedge funds ("AJW Funds"), which
invest in PIPE transactions (private investment in public equity).
2. From July 2004 to June 2009, Ribotsky misappropriated for his personal use over
$1 million of assets from one of the AJW Funds he was managing through NIR - the AJW
Qualified Partners, LLC Fund ("AJW Qualified Fund"). Ribotsky liquidated some of AJW
Qualified Fund's assets and misused the proceeds by writing checks to pay for personal services
and to purchase luxury items, including cars and expensive jewelry. Ribotsky also wrote checks
to himself or to "cash" and then instructed NIR office employees to cash the checks at a nearby
bank and 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.
3. In addition to misappropriating client assets, Ribotsky made false and misleading
statements to investors in 2007,2008 and 2009 about the AJW Funds' performance and liquidity.
In particular, Ribotsky falsely told investors that, despite the adverse market conditions ofthat
time, NIR could liquidate - that is, fully convert to cash - all of the AJW Funds' PIPE
investments in 36 to 48 months. This,howevet, was a practical impossibility under the
investment and trading strategy that NIR touted, given the size of the AJW Funds' PIPE
investments and the adverse market conditions at the time.
4. Ribotsky made these false and misleading statements even after the AJW Funds'
outside auditor met with him to disc:usst.heresuhs oftheir audit procedures, in which the auditor
calculated that it would take decades, if ever, to liquidate all ofthe AJW Funds' PIPE
investments under NIR's stated investment and trading strategy. This was due, in part, to the
fact that by January 2008, NIR had acquired, in many instances, the contractual right to billions
of shares of stock in non-performing, distressed companies that were quoted at mere fractions of
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a penny mostly on the Pink Sheets (now OTe Link), a private electronic inter-dealer quotation
and trading system used in the over-the-counter market. These issuers had very little, if any,
trading volume in relation to the billions of shares that the AJW Funds were contractually
entitled to receive.
5. Furthermore, in November and December 2008, Ribotsky purported to sell $43.2
million ofthe AJW Funds' assets to a third-party (the "Purchaser") in an apparent effort to show
investors that NIR was continuing to generate cash (or realized gains) in the fourth quarter of
2008. The Purchaser, however, did not pay cash for the AJW Funds' assets; rather, he signed
"promissory notes" agreeing to pay the full $43.2 million purchase price in cash within 3-6
months. The Purchaser defaulted on the promissory notes and never paid for the assets, yet he
continues to own and control the assets and has not returned them to the AJW Funds.
6. Ribotsky and NIR defrauded investors by failing to conduct any due diiigence on
the Purchaser or his entities before committing the AJW Funds to the transaction. Ribotsky and
NIR failed to conduct any due diligence despite the fact that 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. Had Ribotsky conducted any
meaningful due diligence, as he had told investors he would do, Ribotsky would have learned
that entering into a multi-million dollar transaction with the Purchaser and his entities was not in
the best interests ofthe AJW Funds becausethePurchaserand-pis-entities were not creditworthy
counter-parties. For example, they had no meaningful assets or money to pay for the assets they
were acquiring from the AJW Funds and they had a number of unpaid debts, judgments and liens
against them.
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7. Ribotsky further defrauded investors by instructing Dworkin, an NIR employee,
to mislead investors by, among other things, falsifying certain documents that were sent to
investors. In particular, in August 2007, Dworkin prepared an investor chart accurately showing
that NIR had invested a total of $31.4 million in 57 deals for the relevant period. After Ribotsky
reviewed the chart, he told Dworkin that "investors can't see this" and he instructed Dworkin to
"change the number to something near $60 million" before sending it to investors, apparently
because Ribotsky wanted investors to see an average investment of at least $1 million per deal.
Dworkin followed Ribotsky's instructions and changed the figure to $58.6 million on the chart.
The falsified chart was subsequently sent to investors.
8. Ribotsky also defrauded investors by using money from one group of investors to
pay another group of investors without adequately disclosing this to any of the investors. In May
2007, Ribotsky told investors in an AJW off-shore fund and an AJW on-shore fund that NIR was
merging the two funds to create an AJW "master fund." Ribotsky, however, did not disclose to
the investors that the reason he was merging the two funds was to gain access to the cash in the
off-shore fund to pay outstanding investor redemptions in the on-shore fund. At the time, the on
shore fund lacked sufficient cash, or the ability to generate sufficient cash, to pay all of the
outstanding investor redemptions.
VIOLATIONS OF THE FEDERAL SECURITIES LAWS
9. By virtue ofthe conduct alleged in this complaint, Ribotsky and NIR, directly or
indirectly, singly or in concert, have engaged in and are engaged in transactions, acts, practices,
or courses of business that constitute violations of Section 17(a) of the Securities Act of 1933
("Securities Act") [15 U.S.C. §§ 77q(a)], Section lOeb) ofthe Securities Exchange Act of 1934
("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.lOb-5] thereunder, and
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Sections 206(1), 206(2), 206(4) ofthe Investment Advisers Act of 1940 ("Advisers Act") [15
U.S.C. §§ 80b-6(1), (2) and (4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
10. By virtue ofthe conduct alleged herein, Dworkin is liable (a) pursuant to Section
20(e) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78t(e)], for
aiding and abetting NIR's and Ribotsky's violations of Section lOeb) of the Exchange Act [15
U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; and (b) pursuant to Section
209(d) of the Investment Advisers Act ("Advisers Act") [15 U.S.C. § 80b-9(e)], for aiding and
abetting NIR's and Ribotsky's violations of Section 206(4) of the Advisers Act [15 U.S.C. §
80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
11. The Commission brings this action pursuant to the authority conferred upon it by
Section 20(b) ofthe Securities Act [15 U.S.C. § 77t(b)], Section 21(d)(1) ofthe Exchange Act
[15 U.S.C. § 78u(d)(1)], and Section 209 of the Advisers Act [15 U.S.C.§80b-9].
12. The Commission seeks a judgment (a) permanently enjoining Defendants from
committing future violations of the above provisions of the federal securities laws; (b) ordering
Defendants to disgorge any ill-gotten gains with prejUdgment interest thereon; (c) ordering
Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15
U.S.C. § 77t(d)], Section 21 (d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)], and Section 209
of the Advisers Act [15 U.S;C §80b-9J; and (d) ordering such other arId further relief the Court
may deem just and proper.
JURISDICTION AND VENUE
13. This Court has jurisdiction over this action and venue is proper in the Eastern
District of New York pursuant to Sections20(b) and 22(a) of the Securities Act [15 U.S.c. §§
5
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77t(b) and 77v(a)], Sections 21(d) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and 78aa],
and Sections 209 and 214 of the Advisers Act [15 U.S.c. §§ 80b-9 and 80b-14]. The
Defendants, directly and indirectly, have made use ofthe means and instrumentalities of
interstate commerce, or of the mails, in connection with the transactions, acts, practices and
courses of businesses alleged herein. A substantial portion of the events comprising Defendants'
fraudulent conduct occurred in the Eastern District of New York. NIR maintains its principal
place of business and offices in this District; Ribotsky and Dworkin reside in this District; and
several investors in the AJW Funds reside in this District. Furthermore, Ribotsky
misappropriated client assets in this District and made material misrepresentations and omitted to
state material facts when communicating with investors and potential investors while working
out ofNIR's offices in'this District.
DEFENDANTS
14. NIR is an unregistered investment adviser located in Roslyn, New York. NIR
was organized as a limited liability company in November 1999 and is controlled by Ribotsky,
who is the firm's sole managing member. For a brief period in 2006, NIR was registered with
the Commission as an investment adviser, but NIR withdrew its investment adviser registration·
just a few months after registering with the Commission. At all times relevant to the allegations
in the complaint, NIR provided investment advisory and management services to the AJW Funds
through various wholly-owned affiliated entities that serve as managing members of the
individual funds.
15. Ribotsky, age 40, resides in Old Westbury, New York. Ribotsky is the sole
managing member ofNIR and controls all ofthe operations and activities ofNIR. Ribotsky does
6
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not hold any securities licenses. Ribotsky attended Brooklyn Law School and NYU Business
School for a period of time, but he did not graduate or receive a degree from either institution.
16. Dworkin, age 42, resides in Syosset, New York. Dworkin was an NIR analyst
from September 2002 through March 2003. He later returned to work at NIR as an analyst from
April 2004 through April 2008. On July 7, 2010, Dworkin pled guilty in U.S. v. Daryl Dworkin
CR1 0-515 (EDNY) to criminal charges, including conspiracy to commit securities fraud, arising
out of his role in the conduct alleged in this Complaint.
FACTS
General Background
The AJW Funds
17. The AJW Funds are a group of private investment funds that invest in PIPE
transactions. The AJW Funds were formed in 1999 and were managed by Ribotsky through NIR
and its affiliate entities. According to the AJW Funds' audited financial statements for the
period 2000 to 2007, the AJW Funds' assets increased from approximately $17 million in 2000
to approximately $876 million in 2007. The last audited financial statements for the AJW Funds
are for year-end December 31, 2007. The AJW Funds' independent auditor has not issued an
audit report with respect to the AJW Funds' 2008,2009, and 2010 year-end financial statements,
and NIR has not sent investors any audited financial statements for those years.
18. The AJW Fu.'lds were originally comprised of AJW Partners, LLC, New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, and AJW Offshore, Ltd.
19. In June 2007, Ribotsky combined AJW Qualified Partners LLC (an on-shore
fund) and AJW Offshore, Ltd. (an off-shore fund) to form a master/feeder fund named the AJW
Master Fund, Ltd. ("Master Fund").
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20. In October 2008, Ribotsky suspended all investor redemption payments and
formed a new set of AJW funds. The new funds required investors to agree to longer lock-up
periods for redemptions in exchange for lower management and performance fees. The new
funds are New Millennium Capital Partners III, LLC, AJW Partners II, LLC, AJW Qualified
Partners II, LLC, AJW Offshore II, Ltd. and AJW Master Fund II, Ltd. In forming the new
funds, which employed the same PIPE investment strategy, NIR effectively transferred a portion
of the existing AJW fund's assets to the new AJW funds. NIR sent existing investors new
offering documents and subscription agreements for the new AJW funds. Existing investors
were asked to choose whether they wanted to remain in the existing AJW funds or transfer their
investments into the new AJW funds. Most investors elected to transfer their investments into
the new AJW funds.
21. On March 30 and 31, 2011, NIR informed investors in the AJW Funds that NIR
was going to unwind and liquidate the AJW Funds. On April 5, 2011, the Grand Court of the
Cayman Islands ("Grand Court") placed the voluntary liquidation of the off-shore Master Fund
(which accounts for approximately 70% of all of the AJW Funds' assets) under the Grand
Court's supervision. On May 30, 2011, the Grand Court appointed an independent third-party
liquidator for the Master Fund.
NIR's PIPE Investment and Trading Strategy
22. Ribotsky, acting through NIR a..'1d its affiliated entities, provides investment
advisory and management services to the AJW Funds. The AJW Funds were typically invested
in 120-130 different companies at any given time. Ribotsky touted the PIPE strategy in investor
publications as NIR's "own unique proprietary investment strategy and investment process."
The AJW Funds provided cash financing to micro-cap distressed, emerging-growth, and start-up
8
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companies quoted on the Over-the-Counter Bulletin Board ("OTC-BB") or the Pink Sheets.
Most of the companies in which NIR invested the AJW Funds' money trade for pennies per
. . .
share, or for fractions of a penny, in very thinly traded markets. Some of the companies do not
trade at all. NIR purportedly provided the companies financing in "tranches" that it claimed
extended over 2-4 years.
23. The AJW Funds typically received convertible debentures that paid an annual
interest rate of 4% to 12% and had a default penalty of 15% that applied to unpaid principal and
interest at the time of maturity. The outstanding principal and interest under the debentures were
purportedly convertible into the borrower's common stock at a discount (ranging from 35% to
85%) to the stock's market price at the time of conversion. Because the contractual terms ofthe
financing provided that the debt would always be converted at a discount to the share's market
prices at the time of conversion, NIR recorded a "paper profit" (as unrealized gains) when the
PIPE deals closed, and NIR accreted the unrealized gains over a 90 day period.
·24. NIR sought to convert the paper profits (unrealized gains) to cash income
(realized gains) by selling the discounted shares in the open market. The "convert and sell"
trading aspect ofNIR's investment strategy allowed it to record the cash income received from
selling stock in the open market as realized gains on the AJW Funds' books and records and
financial statements.
25. Ribotsky represented to investors that NIR could "liquidate" or "exit" alLofthe
AJW Fund's PIPE investments (i.e., fully convert the debentures to stock and sell the stock)
within 36 to 48 months.
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NIR's Performance History And Management Fees
26. According to the AJW Funds' audited financial statements for the years ending
2000 to 2007, NIR recorded a total of $407 million in returns during that period. Most of the
returns, however, were from NIR's write-up each year ofthe 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.
27. NIR earned management fees equal to 2% of the AJW Funds' assets and
performance fees equal to 20% of the AJW Funds' supposed annual profits, which consisted of
realized and unrealized gains. According to the AJW Funds' audited financial statements, NIR
earned approximately $126 million in management and performance fees during the period 2000
through 2007. Of this amount, approximately $37 million was from management fees and
approximately $89 million was from performance fees.
28. As discussed above, the AJW Funds' independent auditor has not issued an audit
report with respect to the AJW Funds' 2008,2009, and 2010 year-end financial statements, and
NIR has not sent investors audited financial statements for those years.
Failure of NIR's Investment and Trading Strategy
29. By mid to late 2007, NIR's strategy of investing in distressed and start-up
companies began to show signs offailure. Many of the distressed companies that the AJW
Flli'1ds had made loans to were by then essentially defunct or on the verge of filing for
bankruptcy. They were no longer engaging in any meaningful business operations, had "going
concern" reports from auditors, were delinquent in their periodic and other filings,and were
trading, if at all, primarily on the Pink Sheets for mere fractions of a penny. Accordingly, the
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companies that the AJW Funds had loaned money to in prior years were now defaulting on their
loan and conversion obligations in 2007.
30. In order to avoid the possibility that NIR would need to write-down the fair value
of the AJW Funds' investments in delinquent and non-performing companies, Ribotsky chose to
"restructure" the outstanding debt by issuing new debentures to the same delinquent and non
performing companies. Ribotsky rolled the outstanding principal, interest, and default penalties
into new debentures and negotiated greater conversion discounts for the issuers' shares.
Although this restructuring strategy contractually entitled the AJW Funds to a greater number of
shares, for most of the companies, there was little, if any, trading volume for their stock by late
2007. By restructuring the loans in this manner, NIR ended up recording more and more
unrealized gains for the investments and avoided having to disclose to investors what otherwise
would have been an ever-growing number of defaulted loans held by the AJW Funds.
31. The practical effect of the debt restructurings, however, was that it would be
difficult or impossible for NIR fully to "monetize" these PIPE investments - that is, fully convert
the unrealized gains to realized gains - because there was insufficient trading volume to sell the
billions of shares that the AJW Funds were now contractually entitled to under the terms of the
restructured debentures.
32. Despite the fact that by 2007 it was unlikely that NIR could ever fully convert and
liquidate most of the PIPE investments, NIR was still reporting double digit performance returns
for the AJW Funds. Ribotsky and NIR were able to do so by restructuring bad debt, which
resulted in the recording of more and more unrealized gains. NIR continued to earn management
and performance fees that were calculated, in part, by reference to the period-over-period
increase in unrealized gains for the AJW Funds' now illiquid PIPE investment portfolio. For
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example, during the first six months of2008, NIR earned approximately $7.5 million in
management fees.
The Funds' Independent Auditor Tells Ribotsky It Will Take
Decades, if Ever, to Liquidate the Funds' PIPE Investments
Under NIR's Stated Investment and Trading Strategy
33. In connection with the audit of the AJW Funds' 2007 year-end financial
statements, the AJW Funds' independent auditor (the "Auditor") analyzed the amount of time it
would take NIR to liquidate the PIPE investments under NIR's stated investment and trading
strategy. Based on several different audit procedures that the Auditor performed in early 2008,
the Auditor calculated that it would take NIR decades, if ever, to liquidate the AJW Funds' PIPE
investments. The Auditor met with Ribotsky several times over the course of January, February
and May 2008 to discuss the results of their analyses and provided him with their audit work
papers detailing their analyses.
34. One ofthe audit procedures that the Auditor conducted was an "aging analysis" of
the AJW Funds' PIPE investment portfolio. This analysis concluded that it would take NIR 25
years to liquidate just one-half of the PIPE investment portfolio and an unspecified amount of
time beyond 25 years to liquidate the remaining half. In fact, the Auditor's work papers note that
that actual number of years it would take to liquidate the PIPE investments was even greater
because the aging analysis assumed that NIR was the only party selling stock in the thinly traded
markets for these securities, 'wpich would not be the case. The aging analysis was based on 2007
market conditions, including the companies' share price on December 31,2007 and the average
daily trading volume over a six month period leading up to that date.
35. In another analysis, called a "turnover analysis," the Auditor calculated that it
would take NIR approximately 11 years to liquidate the entire PIPE investment portfolio. This
12
--- page 13 ---
analysis was based on NIR's 2007 rate of turnover for the PIPE investment portfolio. The
Auditor calculated that NIR liquidated approximately 9% ofthe PIPE investment portfolio in
2007 and, at that rate, it would take approximately 11 years to liquidate the entire PIPE
investment portfolio.
36. The Auditor also performed an analysis ofthe AJW Funds' top 25 PIPE
investments to determine how long it would take NIR to liquidate these investments, which
accounted for 62% of the total value of the AJW Funds' PIPE investment portfolio. The Auditor
calculated that, as of December 31,2007, only 3 out ofthe 25 investments could be liquidated in
4 years or less. The Auditor calculated that it would take tens and, in some cases, hundreds of
years to liquidate most of the PIPE investments under NIR's stated investment and trading
strategy. In fact, the Auditor calculated that 2 PIPE investments would take over 700 years to
liquidate and that 3 PIPE investments were in companies that had no trading activity at all for
their common stock. This meant that it was unlikely that these PIPE investments could ever be
liquidated in the open market.
37. For example, one of the AJW Funds' largest PIPE investments was a $6.8 million
principal investment in a company called Modem Technologies ("MODC"), which was a Pink
Sheet stock that had been delisted from the OTC-BB on October 25,2006 for failing to file
required financial reports. The Auditor's analysis revealed that, as of December 31,2007, NIR
was carrying this inv€stment on the AJW Funds' books at a discounted fair value of$16.8
million, which was based on the AJW Funds' contractual right to convert the· outstanding loan
amount into 27 billion shares ofMODC stock, which was quoted for $0.001. per share on the
Pink Sheets as of December 31, 2007. Based on the six month average daily trading volume,
which was just 145,295 shares per day, the Auditor calculated that it would take NIR
13
--- page 14 ---
approximately 751 years to fully convert and sell out of this investment in order to liquidate
(i.e., fully convert to cash) under NIR's stated investment and trading strategy.
38. The following is a summary of the Auditor's calculations for the number of years
it would take NIR to liquidate the AJW Funds' Top 25 PIPE investment under NIR's stated
investment and trading strategy:
AJW Funds
Top 25
12/3112007
Company Total Shares Price Per Share Est. Years to
(Convertible) Fully
Convert/Sell
MHGI 188,133,397,544 $0.00019 95
TXTG 4,716,667 $0.75 20
DLAV 12,206,262,745 $0.00388 4
EPCG 133,626,458,246 $0.00019 137
CCNG 233,423,636,923 $0.00013 711
MODC 27,165,483,400 $0.001 751
CYBL 853,979,379 $0.0255 0
ACTK Not Traded Not Traded Not Traded
CYDF 3,419,062,087 $0.00631 8
WTVN 25,886,054,761 $0.00113 27
GLBT 194,157,196,923 $0.00013 43
GRWW 3,060,022,063 $0.007 32
PFEH 50,004,640,632 $0.00038 96
CYSG 133,357,891,154 $0.00013 140
MGWL Not Traded Not Traded Not Traded
DIBZ Not Traded Not Traded Not Traded
ASVN 57,297,025,161 $0.00031 12
AVTI 4,175,406,116 $0.00419 8
SSHS 24,153,329 $0.30 99
BNYN 10,424,152,107 $0.00138 10
ABPH 3,354,056,010 $0.004 20
INSN 103,916,252,747 $0.00013 41
IGAI 24,337,922,632 $0.00038 31
ITRO 4,741,356,611 $0.00263 1
ADMH 4,108,354,114 $0.003 8
14
--- page 15 ---
The Fraudulent Conduct
Misappropriation of Fund Assets
39. Sometime after forming the AJW Funds in 1999 and 2000, Ribotsky and a
business partner decided to set up a private company to make personal PIPE investments for
themselves. They formed a private investment vehicle called Equilibrium Equity, LLC
("Equilibrium") which made the same type of PIPE investments that the AJW Funds were
making. That is, they made loans to micro-cap companies in exchange for debentures that
allowed the loans to be converted into the issuers' stock. Sometime after forming Equilibrium,
Ribotsky bought out his partner. Ribotsky then became the sole member of Equilibrium and,
therefore, the sole owner of the convertible debentures that constituted Equilibrium's sole assets.
40. In July 2004, Ribotsky decided to personally invest in one of the funds he was
managing - the AJW Qualified Fund. However, instead of investing in the fund by making a
payment to the AJW Qualified Fund, Ribotsky chose to make an "in-kind" investment by
assigning and transferring to the AJW Qualified Fund all of the assets (convertible debentures)
that Ribotsky owned through his private company, Equilibrium. Ribotsky transferred all of
Equilibrium'S debentures, which he valued at $581,525, to the AJW Qualified Fund in July 2004.
At that point, Ribotsky became an investor in the AJW Qualified Fund under the same terms and
conditions as the other investors in the fund and he relinquished all of his direct ownership
interest in the debentures which he previously oVffi€d through Equilibriu.TJ1.
41. Almost immediately after making his personal investment in the AJW Qualified
Fund, Ribotsky began to misappropriate assets from that fund for his personal use. From August
2004 through June 2009, Ribotsky converted the debentures that he had transferred from
Equilibrium to the AJW Qualified Fund into the issuers' common stock. Ribotsky then arranged
15
--- page 16 ---
to have the stock delivered to an Equilibrium brokerage account instead of an AJW Qualified
Fund brokerage account. Ribotsky then sold the stock in the open market and transferred the
cash proceeds to an Equilibrium bank account instead of an AJW Qualified Fund bank account.
In total, between August 2004 and June 2009, Ribotsky generated approximately $1,060,000 in
cash proceeds in the Equilibrium brokerage and bank accounts by converting debentures and
selling stock that belonged to the AJW Qualified Fund. Ribotsky misappropriated nearly all of
this money for his personal use, as described below.
42. Between June 2006 and April 2008, Ribotsky withdrew $155,500 in cash from
Equilibrium'S bank account by writing checks to himself or to cash. Ribotsky instructed office
employees to take the checks to a local bank, cash them, and give him the money. In addition,
between August 2004 and March 2008, Ribotsky misappropriated additional money from the
sale of stock that belonged to the AJW Qualified Fund and its investors as follows: (i) writing
checks totaling $24,681 for Lexus and Mercedes car payments; (ii) writing a check to a jewelry
store for $15,750 to purchase a Rolex watch; (iii) withdrawing $19,000 in cash from ATM
machines; (iv) spending $23,000 for audio and computer services for his home residence; and
(v) transferringnearly $815,000 to various personal bank accounts or accounts under his control
that were not accounts that belonged to AJW Qualified Fund.
43. At some point in 2004, NIR's head accountant told Ribotsky that Ribotsky could
---not take for himself the money in the Equilibrium accounts that came from the conversion of
debentures and the sale of stock that belonged to the AJW Qualified Fund and its investors.
Ribotsky told the head accountant "not to worry about it" and he continued to take the money for
himself.
16
--- page 17 ---
False and Misleading Statements and Omissions of Material Fact
Time Required to Liquidate the AJW Funds' PIPE Investments
44. In 2007 and 2008, Ribotsky told investors and prospective investors that NIR
could "liquidate" or "exit" all ofthe AJW Funds' PIPE investments in 36 to 48 months.
Ribotsky continued to tell this to investors even after the Auditor showed Ribotsky their analyses
calculating that it would take NIR decades, if ever, to liquidate all ofthe AJW Funds' PIPE
investments under NIR's stated investment and trading strategy.
45. . Specifically, Ribotsky made the following false and misleading statements to
investors:
(a) October 21,2008 email from Ribotsky to investor
Investor: "How much in proceeds could you realistically have raised if
you had to convert as much as you could and tried to sell the converted
shares?"
Ribotsky: "[W]e could if needed sell the entire portfolio in 36 months
getting the current N AV. If we were to want to fire sale it, the time would
be less, but we may not get the exact discounted market value we carry the
investments at."
(b) March 30, 2008 email from Ribotsky to investor, attaching Due
Diligence Ouestionnaire signed by Ribotsky
Q: Describe your strategy (in as much detail as possible):
A: N.I.R. specializes in private placements in public small
capitalization companies ... PIPE's are structured as convertible preferred
securities, or secured convertible debt that converts to common stock, Full
Liquidation could take from 1 to 4 or more years.
(c) July 17,2008 email from Ribotsky to investor
Ribotsky: "Vie usually look at the total sale of the whole portfolio if we
were going to sell it all in approximately 36 to 48 months."
(d) October 16, 2008 letter signed by Ribotsky to investors
Ribotsky: "[I]t is generally expected to take approximately 36 months or
longer to successfully sell the securities of all of the portfolio companies
held by the [AJW Funds]."
17
--- page 18 ---
(e) October 1, 2007 email from Ribotsky to investor
Investor: "How liquid is your portfolio? How fast can you liquidate 50%,
75% and 100%?"
Ribotsky: "As you know unlike most we always have 15-25% in cash at
all times ... [and] [t]o liquidate the remaining 75% in total in a complete
liquidation of the fund we would say approximately 36 months." .
46. Ribotsky's statements above representing the length oftime it would take NIR to
liquidate the AJW Funds' portfolio of PIPE investments were materially false and misleading in
light ofthe market conditions at the time. The statements were false because by late 2007 most
of the AJW Funds' PIPE investments were convertible into billions of shares of stock in
companies that traded for mere fractions of a penny and had little, if any, trading volume in
relation to the billions of shares that the AJW Funds were contractually entitled to receive.
Therefore, it would take decades, if ever, for NIR to convert and sell the stock in those
companies in order to liquidate the AJW Funds' PIPE investments under NIR's stated
investment and trading strategy.
47. In fact, as of December 31, 2007, at least seven companies in which the AJW
Funds had invest(!d did not trade at all and, therefore, there was no trading market for NIR to sell
the stock of these companies. The Auditor met with Ribotsky in early 2008, and showed him
their analyses calculating that the length of time if would take NIR to liquidate the AJW Funds'
PIPE investments under NIR's stated investment and trading strategy was nowhere close to the
36 to 48 month period Ribotsky was telling investors. Therefore, Ribotsky knew, or was at least
reckless in not knowing, that his statements to investors about the length of time it would take
NIR to liquidate the PIPE investments were false and misleading at the time he made them.
48. Ribotky's statements were also misleading because Ribotsky omitted material
information when making the statements to investors. In order to make Ribotsky's statements to
investors not misleading, Ribotsky should have told investors, at a minimum, that the 36 to 48
18
--- page 19 ---
month exit period he was representing was not possible under the market conditions existing in
late 2007 and 2008. By failing to disclose this relevant and material information when
communicating with investors, Ribotsky misled investors into believing that, despite the adverse
market conditions of late 2007 and 2008, NIR could still fully liquidate the AJW Funds' assets in
36 to 48 months.
Additional False and Misleading Statements and Omissions of Material Fact
49. In addition to the false and misleading statements Ribotsky made to investors in
late 2007 and 2008 about the time it would take to liquidate the AJW Funds' assets, Ribotsky
made other false and misleading statements in late 2007,2008, and 2009 about the AJW Fund's
liquidity and performance.
50. The following statement made by Ribotsky was false and misleading:
October 21, 2008 email from Ribotsky to investor
Investor: "What are the proceeds from converted stocks you have sold this month
of October?"
Ribotsky: "We typically sell $5 million to $15 million a month. This month
[October] has been a little slower while September was a little better."
51. Ribotsky's answer to this investor's question was false and misleading because
the AJW Funds' monthly stock sales proceeds for.September and October 2008 were nowhere
near the $5 to $15 million monthly range that Ribotsky referenced in his email. In fact, the AJW
Funds' monthly stock sales proceeds for September and October 2008 were just $277,561 and
----$131,802, respectively. Moreover, from February to October 2008, the AJW Funds' monthly
proceeds from selling stock never exceeded $1 million.
52. The investor to whom Ribotsky sent this false and misleading statement
subsequently invested his IRA savings in the AJW Funds in early 2009.
19
--- page 20 ---
53. The following statement made by Ribotsky was false and misleading:
November 7-8,2007 email from Ribotsky to investor
Ribotsky: "But in this case [ABPH] the liquidity of the deal is within the time
frame [2-4 years] we have allotted for it ...."
54. Ribotsky's statement was false and misleading based on the 2007 market data
available to him at the time he made the statement. According to the Auditor's subsequent
calculations, which were based on essentially the same market data, the exit period for the
particular investment Ribotsky was referring to in his email - ABPH - was approximately 20
years.
55. The following statement made by Ribotsky was false and misleading:
March 30, 2008 email from Ribotsky to investor, attaching Due Diligence
Questionnaire signed by Ribotsky
Q: "What is the longest term held security in the fund and why?"
A: "5 years but extremely small positions that continue to be slowly being
[sic] sold into the market."
56. This statement was false and misleading because Ribotsky knew at the time he
made it that the AJW Funds had a number of PIPE investments that were older than 5 years. In
fact, the AJW Funds had PIPE investments in at least 15 companies that dated as far back as
2000,2001 and 2002. These investments were still being carried on the AJW Funds' books,
presumably because they were illiquid and NIR could not fully convert and sell out of these
positions under NIR's stated investment and trading strategy.
57. The following statement made by Ribotsky was false and misleading:
December 10, 2008 email from Ribotsky to investor
Investor: "When I inquired a few months ago, you ha4 not yet had any defaults or
bankruptcies in your portfolio but indicated that is always a possibility. Have
there been any defaults or bankruptcies since?"
Ribotsky: "No defaults or no bankruptcies."
20
--- page 21 ---
58. Ribotsky's statement was false and misleading because several companies in
which the AJW Funds were invested had, at the time, already defaulted in 2008. On June 13,
2008, Ribotsky was copied on an internal NIR email advising him that 2 portfolio companies
were in default. The email read: "PFMS ... defaulted as of 4/18 [and] RKLC ... defaulted as of
5/2." Therefore, Ribotsky knew that at least two companies had defaulted in 2008 when he told .
the investor there were "no defaults." In addition, another internal NIR email, dated August 21,
2008, from an NIR analyst lists at least 3 companies that were in default: "Companies in default
are ADMH, RKLC, UNVC." Although Ribotsky is not listed as a recipient of this email, the
email was circulated within NIR and was based on the research of an NIR employee. Therefore,
this information was certainly available to Ribotsky when he told the investor that there were no
defaults in 2008. This is the same investor who invested his IRA savings in the AJW Funds in
early 2009.
59. The following statements made by Ribotsky were false and misleading:
(a) June 30, 2008 email from Ribotsky to investor
Investor: "Can you please tell me what the status [is of the AJW Funds'
2007 audited financial statements] and why this is taking longer than
expected ?"
Rihotsky: "Unfortunately they [the Auditor] have taken longer this year
and with our switch to the master/feeder structure have to do some
additional audit procedures. FUrther to that there are new aUditing
standards for all funds that are creating some backlog throughout the
auditing community."
Investor: "We know that dealing with an external auditor can take more
time then [sic] expected. I just want to check if this is the only reason for
the delay." .
Rihotsky: "Yes this is the only reason for the delay."
(b) January 14, 2009 email from Ribotsky to investor
Investor: "Why was the audit for 2007 not issued until August 14, 2008?"
Rihotsky: "The 07 audit was delayed due to personnel changes at the
auditor."
21
--- page 22 ---
60. Ribotsky's answers were false and misleading because the delay in the 2007 audit
of the AJW Funds' financial statements was due to the Auditor's concerns about whether NIR
was properly recording the fair market value of the PIPE investments. The delay was not due to
personnel changes at the Auditor or to the switch to the master feeder fund structure, as Ribotsky
told the investors. In response to the Auditor's valuation concerns, and at the Auditor's request,
NIR retained a third-party valuation expert in June 2008 to review the methodology that NIR
was using to record the fair market value of the PIPE investments. The third-party valuation
expert completed its report in July 2008. The Auditor subsequently concluded its audit work and
issued an unqualified audit report for the AJW Funds' year-end December 31, 2007 financial
statements in August 2008. Ribotsky's failure to mention the real reason for the audit delay-
that the Auditor had concerns about whether NIR was properly recording the fair market value of
the PIPE investments and, therefore, required additional audit procedures - rendered Ribotsky's
answers to the investors' questions about the audit delay false and misleading.
61. The following statement made by Ribotsky was false and misleading:
March 16, 2008 newsletter signed by Ribotsky to investors
"In terms of [Q4 2007] deal highlights, the following are examples of two
companies that we added to our portfolio ... The first company is a developer of
environmental process technology for photochemical, silver, and water recycling.
.. The second portfolio company is focused on becoming the content
management system for social networks and small business markets."
62. Ribotsky's statement was false and misleading because the two companies
described in the newsletter were not "added to [the] portfolio." Rather, they were existing
portfolio companies that NIR simply provided additional financing to during the fourth quarter
of 2007. The ability of NIR to continue making investments in new companies was important to
investors because it demonstrated to investors that, despite the adverse market conditions in late
2007 and 2008, there was still a market for NIR's PIPE investment strategy.
22
--- page 23 ---
63. The false and misleading statements and omissions of material facts alleged above
were made in the offer or sale and in connection with the purchase or sale of securities because
they were made to prospective and existing investors, many of whom made subsequent
investments in the AJW Funds. For example, Ribotsky sent the March 30,2008 email and
attached due diligence report, described above, to a prospective overseas investor. After
receiving the email and due diligence report, the overseas investor invested $25 million in the
AJW Funds in May 2008. Moreover, Ribotsky sent the July 17,2008, October 21,2008,
December 10,2008, and January 14,2009 emails, described above, to the same prospective
investor who, after receiving the emails, invested $122,256 of his IRA money with the AJW
Funds in early 2009.
64. In addition, Ribotsky sent the October 16, 2008 letter, described above, to existing
investors asking them to invest in newly-created AJW funds. The first sentence of the October
16,2008 letter states: "We [NIR] are ... offering you interests in a newly-organized entity...."
NIR sent existing investors private placement memoranda and subscription agreements
concerning the newly-created AJW funds. Existing investors who chose to invest in the newly
created AJW funds did so by executing subscription agreements that represented their portion of
ownership in the new AJW funds.
Falsification of Investor Documents
65. Ribotskyfb.."ther defrauded investors by instructing Dworkin, an NIR employee,
to mislead investors by, among other things, falsifying certain documents that were sent to
investors. In particular, in August 2007, Ribotsky instructed Dworkin to inflate the total amount
of investor money that NIR had invested in 57 deals during the first seven months of 2007
(through July 31,2007). Dworkin initially prepared the chart accurately showing that NIR had
23
--- page 24 ---
invested a total of $31.4 million in the 57 deals for the relevant period. Dworkin then sent the
chart by email to Ribotsky on August 13,2007.
66. After Ribotsky reviewed the chart that Dworkin had prepared, Ribotksy stated
"investors can't see this" and he instructed Dworkin to "change the number to something near
$60 million" before sending it to investors, apparently because Ribotsky wanted investors to see
an average investment of at least $1 million per deal. Dworkin followed Ribotsky's instructions
and changed the figure to $58.6 million on the chart. The next day, August 14,2007, Ribotsky
sent the falsified chart by email to an investor. The falsified chart was also sent to at least one
other investor on October 15,2007.
The $43.2 Million Sale of Fund Assets
67. By the fourth quarter of 2008, Ribotsky knew that NIR's investment and trading
strategy could not generate enough cash from selling stock to keep up with mounting investor
redemption requests and that NIR was, in fact, starting to incur trading losses. The AJW Funds
suffered nearly $3.9 million in realized trading losses in the month of October 2008 alone. Faced
with the reality that his investment strategy would result in significant fourth quarter 2008
realized trading losses - and likely year-end realized trading losses as well - Ribotsky entered
into a series of transactions in which he purported to sell some ofthe AJW Funds' assets (PIPE
investments in the form of convertible debentures) that NIR valued at $43.2 million to the
Purchaser and certain entities controlled by the Purchaser.
68. In November and December 2008, Ribotsky (on behalf of the AJW Funds) and
the Purchaser (on behalf of his entities) entered into nine separate transactions in which the AJW
Funds purportedly sold $43.2 million of convertible PIPE debentures to the Purchaser's entities.
The debentures that Ribotsky purported to sell the Purchaser had a face value of$12.6 million,
which represented the AJW Funds' principal investment in the companies that issued the
24
--- page 25 ---
debentures. The Purchaser, however, did not pay cash for the debentures; rather, he signed a
series of "promissory notes" agreeing to pay the full purchase price in cash within 3-6 months.
The Purchaser also executed a "personal guarantee" promising to personally pay the full
purchase price for the debentures in the event his entities could not do so.
69. These transactions, however, were not in the best interests ofthe AJW Funds and
its investors, and Ribotsky did not perform any due diligence with respect to the Purchaser or his
entities before entering into the transactions. Ribotsky entered into the transactions in the hopes
of being able to hide the trading losses that the AJW Funds were incurring in the fourth quarter
of2008. In fact, by recording the proceeds from the debenture transactions as "sales" on the
books and records of the AJW Funds, NIR recorded $18 million in net realized gains on the 2008
AJW Funds' books and records. Without the proceeds from the debenture transactions, however,
the 2008 AJW Funds' books and records would have reflected net realized losses of $3.4 million.
70. The Purchaser defaulted on his payment obligations and to this date, he has not
paid for the debentures. The Purchaser and his entities have control and possession of the
debentures. Ribotsky has not commenced any legal action on behalf of the AJW Funds to seek
payment for the debentures or their return to investors. Nor has Ribotskydisclosed to the
investors that he arranged for the AJW Funds to sell $43.2 million oftheir assets, that the
Purchaser defaulted on his payment obligations, and that the AJW Funds no longer have
71. Ribotsky and NIR defrauded investors by failing to conduct any due diligence
with respect to the Purchaser and his entities before entering into the multi-million dollar
transaction with them. Ribotsky and NI.R failed to conduct any due diligence despite the fact
25
--- page 26 ---
that NIR's offering materials and investor communications touted the "extensive" due diligence
that NIR would conduct before making investment decisions on behalf of the AJW Funds.
72. For example, Ribotsky and NIR made the following disclosures to investors
relating to NIR's due diligence protocols:
(a) NIR Quarterly Newsletter signed by Ribotsky to investors,
October 2008
"NIR does extensive due diligence and credit work on all transactions."
(b) AJW Qualified Partners II, LLP Private Placement Memorandum,
October 2008
"The Investment Manager believes that the first and most essential step to
successful investing is the identification and uncovering of as much
infonnation as possible about an investment opportunity. This process is
facilitated by the extensive primary research conducted by the Investment
Manager on businesses and industries."
(c) NIR Investor Presentation, (undated)
"Extensive due diligence is perfonned before any investment is made ....
[t]he process entails detailed descriptions and analysis of all pertinent
financial, legal, and accounting infonnation both past and present."
73. Despite these, and other similar, due diligence related representations made to
investors, Ribotsky and NIR did not conduct any due diligence with respect to the Purchaser or
his entities before entering into the transactions with them in November and December 2008.
Ribotsky and NIR did not request or receive any documentation to assess the creditworthiness of
the Purchaser and his entities, or to verify that the Purchaser and his entities had any meaningful
assets or the financial means to pay for the debentures.
74. Ribotsky's prior business dealings with the Purchaser should have placed
Ribotsky on notice, ifhe was not already, that entering into the multi-million dollar transaction
with the Purchaser was not in the best interest of the AJW Funds. Prior to entering into the
debenture transactions in November and December 2008, Ribotsky knew, and in fact he had told
others, that the Purchaser's character and reputation for honesty were suspect. For example, in
26
--- page 27 ---
an email to a co-worker, dated April 30, 2008, Ribotsky wrote: "[The Purchaser] is a thief [sic]
and crook." In another email, dated February 19,2008, Ribotsky wrote: "[The Purchaser] has a
checkered past and now his reputation preceeds [sic] him." Ribotsky also knew, prior to
November and December 2008, that the Purchaser paid bribes to an NIR employee in order to
secure investments from the AJW Funds in start-up companies that the Purchaser was
representing. Ribotsky learned about these bribes in September 2008, which was two months
before Ribotsky entered into the transactions to sell AJW Fund assets to the Purchaser.
75. Had Ribotsky or NIR performed any meaningful due diligence with respect to the
Purchaser and his entities, as Ribotsky told investors NIR would do, Ribotsky would have known
that entering into a multi-million dollar transaction on behalf oftheAJW Funds with the
Purchaser and his entities clearly was not in the best interest of the AJW Funds. In particular,
Ribotsky would have known that the Purchaser had a long history of personal and business credit
problems and outstanding judgments and that neither the Purchaser nor his entities had any
meaningful assets or the financial means to pay for the debentures.
76. In'fact, the Purchaser had less than $30,000 in the bank account of his entities at
the time of the transactions in November and December 2008. Although at one point tl;1e
Purchaser gave Ribotsky a $700,000 check towards the debenture purchases, the Purchaser
subsequently stopped payment on the check before it was cashed. As of the date on the check,
April 12, 2009, t..ltere was less than $500 in the ba.TIk accotL'lt on which the check was written.
The Purchaser was also personally in debt and had limited financial means and credit. At the
time, there were mUltiple collection matters and judgments against the Purchaser for over
$270,000 in unpaid telephone, credit card, and department store bills. Even a cursory review of
publicly available records would have shown that the collectability of the $43.2 million from the
27
--- page 28 ---
Purchaser and his entities was highly unlikely within the 3-6 month payment period under the
terms promissory notes, if ever.
77. Moreover, after Ribotsky and the Purchaser entered into the last of the
transactions on December 30, 2008, Ribotsky retained a private investigator to conduct a
background check into the Purchaser. The investigator sent Ribotsky a detailed report on
January 4,2009 that, among other things, raised multiple red-flags about the Purchaser and his
entities. In particular, the report listed the Purchaser's poor financial condition and the several
outstanding collection matters and judgments against him and his entities. In fact, the very first
page of the report cautioned Ribotsky as follows:
This memorandum provides a rather disturbing background report on [the
Purchaser].... The information on [the Purchaser] was so disturbing to us that we
went to extra measures to verify these.data and to assure ourselves that all this
negative information was indeed applicable to the subject and not the result of a
confused identity. We are comfortable with the accuracy of this report but leave
it to you to decide on how to proceed in any business dealings here.
78. The report is dated January 4,2009 - just days after Ribotsky closed the last
debenture transactions with the Purchaser on December 30, 2008.
Ribotsky Misled Investors When Forming the Master Fund
79. By 2007, NIR's investment and trading strategy was not generating enough cash
income (realized gains) to pay mounting investor redemption requests. Faced with a lack of cash
to pay all of the outstanding investor redemption requests, Ribotsky paid the redemptions using
other investors' money.
80. In June 2007, Ribotsky combined an AJW off-shore fund with an AJW on-shore
fund by creating a new "master/feeder" fund - the Master Fund. The AJW on-shore fund and the
AJW off-shore fund were the only shareholders in the Master Fund. Pursuant to the
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reorganization, all or substantially all of the assets of both the on-shore and the off-shore funds
were transferred to the Master Fund in exchange for shares of the Master Fund.
81. . At the time Ribotsky merged the on-shore and off-shore funds, there was $39
million in outstanding investor redemption requests in the on-shore fund that were payable in
June and September 2007. However, there was only ·$13 million in cash in the. on-shore fund to
meet these pending redemption requests. During that same period, there was $124 million in
cash in the off-shore fund, but only $28 million in outstanding investor redemption requests in
that fund. Faced with a lack of available cash and the inability to generate sufficient cash by
converting and selling out of the PIPE investments, Ribotsky decided to merge the on-shore and
off-shore funds so that he could use the cash in the off-shore fund to pay the outstanding
redemptions in the on-shore fund.
82. Ribotsky, however, did not disclose to investors in the on-shore and off-shore
funds the real reason why he was merging the funds to create the Master Fund. Rather, Ribotsky
misleadingly told investors that the reason he was merging the funds was because a master
feeder fund structure was inthe best interest ofthe investors in both funds. In a letter to
investors, dated May 7, 2007, Ribotsky stated that the transition by merger to a "master-feeder
fund structure" was "in the best interest ofthe [funds]." He further stated that the merger will
provide for a "larger pool of assets from which to draw," "will be better able to take advantage of
available investment opportllnities and provide increased liquidity," and will "ease the
administrative burden on the [funds]." At a minimum, in order to make his statements to
investors not misleading, Ribotsky should have disclosed the fact that he was merging the two
funds so that he could use the cash in the off-shore fund to pay the outstanding investor
redemptions in the on-shore fund.
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FIRST CLAIM FOR RELIEF
Violations of Section 17(a) of the Securities Act
(NIR and Ribotsky)
83. Paragraphs 1 through 82 are re-alleged and incorporated by reference as if fully
set forth herein.
84. NIR and Ribotsky, directly or indirectly, singly or in concert, in the offer or sale
of securities by the use of means or instruments of transportation or communication in interstate
commerce or by use of the mails: (a) employed devices, schemes or artifices to defraud; (b)
obtained money or property by means of untrue statements of material fact, or omitted to state a
material fact necessary in order to make statements made, in light of the circumstances under
which they were made, not misleading; and/or (c) engaged in transactions, practices, or courses
of business which operate or would operate as a fraud or deceit upon the purchaser.
85. NIR's and Ribotsky's false and misleading statements and omissions were
material because, among other reasons, the misrepresented and omitted facts were important to
prospective and existing investors when making investment decisions concerning the AJW
Funds.
86. By reason of the activities described herein, and in particular the false and
misleading statements and omissions alleged above, NIR and Ribotsky violated Section 17(a) of
the Securities Act [15 U.S.c. §§ 77q(a)].
SECOND CL~A...!M FOR :RELIEF
Violations of Section 10(b) of the Exchange Act and Rule 10b-5
(NIR and Ribotsky)
87. Paragraphs 1 through 86 are re-alleged and incorporated by reference as if fully
set forth herein.
88. NIR and Ribotsky, directly or indirectly, singly or in concert, in connection with
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the purchase or sale of securities by use of means or instrumentalities of interstate commerce, or
of the mails, or ofthe facilities of a national securities exchange, with scienter: (a) employed
devices, schemes or artifices to defraud; (b) made untrue statements of a material fact or omitted
to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; and/or (c) engaged in acts,
, practices, or courses of business which operate or would operate as a fraud or deceit upon other
persons.
89. NIR's and Ribotsky's false and misleading statements and omissions were
material because, among other reasons, the misrepresented and omitted facts were important to
prospective and existing investors when making investment decisions concerning the AJW
Funds.
90. By reason of the activities described herein, and in particular the false and
misleading statements and omissions alleged above, NIR and Ribotsky violated Section 1O(b) of
the Exchange Act [15 U.S.C. § 78j(b)] and Rule lOb-5 [17 C.F.R. § 240.10b-5] thereunder.
THIRD CLAIM FOR RELIEF
Violations of Sections 206(1) and 206(2) of the Advisers Act
(NIR and Ribotsky)
91. Paragraphs 1 through 90 are re-alleged and incorporated by reference as if fully
set forth herein.
92. NIR and F..ibotsky at all relevant times were acting as investment advisers to the
AJW Funds within the meaning of Section 202(11) of the Advisers Act [15 U.S.C. § 80b-2(11)].
93. NIR and Ribotsky, directly or indirectly, singularly or in concert, by use of the
mails or means and instrumentalities of interstate commerce, while acting as investment
advisers: (a) with scienter employed devices, schemes or artifices to defraud any client or
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prospective client; andlor (b) engaged in transactions, practices, or courses of business which
operated as a fraud or deceit upon any client or prospective client.
94. As investment advisers to the AJW Funds, NIR and Ribotsky owed the AJW
Funds fiduciary duties of utmost good faith, fidelity, and care to make full and fair disclosure to
them of all material facts concerning the AJW Funds - including any conflicts or potential
conflicts of interests - as well as the duty to act in the AJW Funds' best interests, and not to act
in their own interests to the detriment of the AJW Funds.
95. NIR and Ribotsky breached their fiduciary duties to the AJW Funds, engaged in
fraudulent conduct and engaged in a scheme to violate Sections 206(1) and 206(2) ofthe
Advisers Act [15 U.S.C. §§ 80b-6(1), (2)] by misappropriating approximately $1 million from
the AJW Qualified Fund, as described above.
96. By reason of the activities described herein, NIR and Ribotsky violated Sections
206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1), (2)].
FOURTH CLAIM FOR RELIEF
Violations of Section 206(4) of the Advisers Act and Rule 206(4)-8
(NIR and Ribotsky)
97. Paragraphs 1 through 96 are re-alleged and incorporated by reference as if fully
set forth herein.
98. NIR and Ribotsky, while acting as investment advisers to pooled investment
vel"tides, the AJW Fu..'1ds, directly or i..'ldirectly, by use ofth.e mails or means or instrumentalities
of interstate commerce: (a) made untrue statements of material fact or omitted to state a material
fact necessary to make the statements made, in the light of the circumstances under which they
were made, not misleading to any investor or prospective investor in the pooled investment
vehicles; andlor (b) engaged in any acts, practices, or courses of business that were fraudulent,
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deceptive, or manipulative with respect to any investor or prospective investor in the pooled
investment vehicles.
99. NIR's and Ribotsky's false and mIsleading statements and omissions alleged
above were material because, among other reasons, the misrepresented and omitted facts were
important to prospective and exiting investors when making investment decisions concerning the
pooled investment vehicles.
100. NIR and Ribotsky violated Section 206(4) ofthe Advisers Act [15 U.S.C. § 80b
6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8] by knowingly, recklessly or
negligently making the materiill misrepresentations and omissions alleged above.
101. By reason of the activities described herein, NIR and Ribotsky violated Section
206(4) ofthe Advisers Act [15 U.S.C. § 80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. §
275.206(4)-8].
FIFTH CLAIM FOR RELIEF
Aiding and Abetting Violations of
Section lOeb) ofthe Exchange Act and Rule IOb-5
(Dworkin)
102. Paragraphs 1 through 101 are re-alleged and incorporated by reference as if fully
set forth herein.
103. NIR and Ribotsky, in connection with the purchase and sale of securities, directly
and indirectly, by the use ofthe means and instrumentalities of interstate commerce or ofthe
mails, knowingly or recklessly (a) have employed devices, schemes and artifices to defraud; (b)
have made untrue statements of material fact and have omitted to state material facts necessary
in order to make the statements made, in the light of the circumstances under which they were
made, not misleading; (c) and/or have engaged in acts, practices and courses of business which
operate as a fraud and deceit upon investors.
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104. Dworkin knowingly provided substantial assistance to NIR and Ribotsky in the
commission of these violations.
105. By reason of the activities described, Dworkin aided and abetted NIR's and
Ribotsky's violations of Section IO(b) of the Exchange Act [15 U.S.C. §§78j(b)] and Rule lOb-5
thereunder [17 C.F.R. §240.1 0~-5].
SIXTH CLAIM FOR RELIEF
Aiding and Abetting Violations of
Section 206(4) of the Advisers Act and Rule 206(4)-8
(Dworkin)
106. . Paragraphs 1 through 105 are re-alleged and incorporated by reference as if fully
set forth herein.
107. NIR and Ribotsky, as investment advisers, made untrue statements of material
facts and omitted to state material facts necessary to make the statements made, in light of the
circumstances under which they were made, not misleading, to any investor or prospective
investor in pooled investment vehicles; and NIR and Ribotsky otherwise engaged in acts,
practices, or courses of business that are fraudulent, deceptive, or manipulative with respect to
any investor or prospective investor in the pooled investment vehicle.
108. Dworkin knowingly provided substantial assistance toNIR and Ribotsky in the
commission of these violations.
109. By reason of the activities described herein, Dworkin aided and abetted NIR's and
Ribotsky's violations of Section 206(4) ofthe Advisers Act [15 U.S.C. § 80b-6(4)] and Rule
206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
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PRAYER FOR RELIEF
WHEREFORE, the·Comrnission respectfully requests a Final Judgment:
I.
Pennanently enjoining NIR and Ribotsky, their agents, servants, employees, attorneys,
and all persons in active concert or participation with them who receive actual notice of the
injunction by personal service or otherwise, and each of them, from future violations of Section
17(a)ofthe Securities Act [15 U.S.C.§ 77q(a)], Section lOeb) of the Exchange Act [15 U.S.C. §
78j(b)] and Rule lOb-5 [17 C.F.R. § 240.lOb-5] thereunder, Sections 206(1),206(2), and 206(4)
of the Advisers Act [15 U.S.C. §§ 80b-6(1), (2) and (4)] and Rules 206(4)-8 thereunder [17
C.F.R. § 275.206(4)-8].
II.
Pennanently enjoining Dworkin, his agents, servants, employees and attorneys and all
persons in active concert or participation with him who receive actual notice of the injunction by
personal service or otherwise, and each of them, from violating and aiding and abetting
violations of Section lOeb) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule lOb-5 thereunder
[17 C.F.R. § 240.lOb-5], and Section 206(4) of the Advisers Act [15 U.S.C. §§ 80b-6(4)] and
Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8].
III.
Ordering NIR and Ribotsk-y, on a joint ai"id several basis, and Dworkin to disgorge any
ill-gotten gains received from their violative conduct alleged in this complaint, and to pay
prejudgment interest thereon.
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IV.
Ordering NIR and Ribotsky to pay civil money penalties pursuant to Section 20(d) of the
Securities Act [15 U.S.C. § 77t(d)], Section 21(d)(3) ofthe Exchange Act [15 U.S.c. §
78u(d)(3)], and Section 209 of the Advisers Act [15 U.S.C. § 80b-9]; and ordering Dworkin to
pay civil money penalties pursuant to Section 21(d)(3) ofthe Exchange Act [15 U.S.C. §
78u(d)(3)] and Section 209(e) of the Advisers Act [15 U.S.C. § 80-9(e)].
V.
Granting such other and further relief as the Court may deem just and proper.
Dated: New York, NY
September 28,2011
~s~~---
Regional Director
Attorney for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
3 World Financial Center - Suite 400
New York, New York 10281
(212) 336-0589 (Fischer)
Email: [email protected]
Of Counsel:
David Rosenfeld
Joseph Dever: ID-9589; [email protected]
Howard Fischer: HF-8582; [email protected]
Kenneth Byrne: KB-9376; [email protected]
36