Fraud Charges Hurled Against Long Island-Based Hedge Fund Manager

Jack Humphrey, Regulatory journalist
September 28, 2011 /

A Long Island-based fund manager is facing charges of defrauding investors in hedge funds investing in PIPE transactions and misappropriating more than $1 million in client assets for his personal use.

The SEC alleged that Corey Ribotsky and his firm The NIR Group LLC lied to investors in several instances to hide the failure of his PIPE investment and trading strategy during the financial crisis.

In an investigation conducted by Joseph Dever, Kenneth Byrne and Christopher Mele of the SEC’s New York Regional Office, it was found that Ribotsky falsely told investors that despite the adverse market conditions he could liquidate all of the PIPE investments in 36 to 48 months — a practical impossibility given the size of the investments.

Meanwhile, Ribotsky misused investor money by writing checks to pay for personal services and such luxury items as a Lexus, Mercedes, and Rolex watch.

Howard Fischer will lead the SEC’s litigation efforts.

A “PIPE” transaction involves “private investment in public equity.” Microcap public companies often engage in PIPE transactions to raise capital.

NIR’s family of AJW Funds provided cash financing to distressed, emerging growth, and start-up microcap companies quoted on the Over-the-Counter Bulletin Board or the Pink Sheets. The AJW Funds were typically invested in 120 to 130 different companies at any given time.

The SEC alleges that beginning in July 2004, Ribotsky began siphoning assets from one of the AJW Funds he was managing through NIR.

Ribotsky typically wrote checks to himself or to “cash” and then instructed NIR office employees to cash the checks at a nearby bank. They would then give Ribotsky the money. Although Ribotsky was warned by NIR’s head accountant that he could not lawfully take this money for himself, Ribotsky continued to do so anyway for the next five years.

According to the SEC’s complaint, NIR’s strategy of investing in distressed and start-up companies began to show signs of failure by mid-to-late 2007. Many of the distressed companies to which the AJW Funds had made loans were by then essentially defunct or on the verge of filing for bankruptcy.

The SEC alleged further that an NIR employee — who also is charged in the SEC’s complaint — prepared an investor chart accurately showing that NIR had invested a total of $31.4 million in 57 deals for the relevant period.

When Ribotsky reviewed the chart, he told the employee that “investors can’t see this” and instructed him to “change the number to something near $60 million” before sending it to investors so they would falsely see an average investment of at least $1 million per deal.

Ribotsky continued to make false and misleading statements to investors even after the AJW Funds’ outside auditor had calculated that it would take decades — if possible at all — to liquidate all of the AJW Funds’ PIPE investments under NIR’s stated investment and trading strategy.

Ribotsky allegedly used money from one group of investors to pay another group of investors in 2007 without adequately disclosing this to any of the investors.

Ribotsky’s misconduct also included his failure to conduct any meaningful due diligence before selling a third party $43.2 million of AJW Funds assets in November and December 2008 — a transaction that allowed Ribotsky to book a purported “realized” gain at a critical time without his funds actually receiving any money.

The complaint seeks a final judgment permanently enjoining Ribotsky and NIR from future violations of the above provisions of the federal securities laws and ordering them to disgorge any ill-gotten gains plus prejudgment interest and pay monetary penalties.

 

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