A Long Island-based investment advisor repeatedly lied to investors to conceal the fact that his PIPE investment and trading strategy was failing during the financial crisis and stole more than $1 million in client assets to buy personal luxury items including a Lexus, a Mercedes and a Rolex watch.
According to a Securities and Exchange Commission charge filed in federal district court in Brooklyn, N.Y., this week, advisor Corey Ribotsky of Roslyn, N.Y.-based The NIR Group LLC falsely told investors that despite the adverse market conditions between 2007 and 2009, he could liquidate all of the PIPE investment he and his firm had made in 36 to 48 months -- a promise that SEC investigators called “a practical impossibility given the size of the investments.”
As of Friday, no criminal charges have been filed against Ribotsky.
A “PIPE” transaction, according the SEC complaint, involves “private investment in public equity,” adding that microcap public companies often engage in PIPE transactions to raise capital.
“In a classic betrayal of trust, Ribotsky stole from his investors and falsely assured them that his struggling hedge funds were thriving,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in the complaint. “This enforcement action reflects our continuing commitment to bring to justice individuals and companies that committed fraud during the credit crisis.”
According to the SEC, NIR’s family of AJW Funds provided cash financing to distressed, emerging growth and start-up microcap companies quoted on the OTC 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,” according to the filing.
“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,” it continued.
By mid- to late-2007, the SEC alleges that NIR’s strategy of investing in distressed and start-up firms began to “show signs of failure” and that many of the companies to which AJW Funds had made loans were “essentially defunct” or “on the verge of filing for bankruptcy.”
Still, Ribotsky continued to lie to investors and deliberate withhold or falsify information to “create the illusion” of success, according to the SEC.
In one instance, another NIR employee, who is also charged in the SEC complaint, prepared an investor chart accurately showing that NIR had invested $31.4 million in 57 deals for the relevant period. However, when Ribotsky reviewed the chart, he told the employee to that “investors can’t see this” and ordered him to “change the number to something near $60 million.”
“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,” according to the SEC complaint.
In addition, SEC investigators said Ribotsky in 2007 used money from one group of investors to pay another group of investors without adequately disclosing the maneuver 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 further alleges, adding that the third-party purchaser soon defaulted on his payment obligations and never paid for any of the assets.
Brad Gertsman, Robitsky's attorney, took issue with the SEC's investigation and complaint.
"I think the complaint appears to be a stretch in an attempt to justify approximately two years of time and resources poured into the investigation," Gertsman said in an emailed statement. "NIR and Ribotsky look forward to defending these allegations in court."
"After years of investigating claims of ponzi scheming and fraudulent valuation, primarily lodged by two disgruntled former employees who had been terminated for improper conduct, The NIR Group and its Managing Partner, Corey Ribotsky have been vindicated in part by the fact that the Securities Exchange Commission’s (SEC’s) long running investigation failed to make a case in support of these specious claims,” the statement continued.
"There are no claims that NIR fraudulently valued the assets of the funds or that NIR took fees that it was not entitled to take. The vast remainder of the complaint 'cherry picks' emails from 2007 and 2008 in an attempt to allege that NIR and Mr. Ribotsky mislead a very small number of investors or potential investors about the time it would take to liquidate the portfolio of the NIR funds," he added.
The SEC complaint charges Ribotsky and NIR with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
The complaint seeks a final judgment permanently enjoining Ribotsky and NIR from future violations of the above provisions of the federal securities laws and ordering them to disgorge any ill-gotten gains plus prejudgment interest and pay monetary penalties.