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U.S. Securities and Exchange Commission

THOMAS A. ZACCARO, Cal. Bar No. 183241
KELLY BOWERS, Cal. Bar No. 164007
MARTIN J. MURPHY, Cal. Bar No. 130693
NAN PRONGAY, Cal. Bar No. 133055

Attorneys for Plaintiff
Securities and Exchange Commission
RANDALL R. LEE, Regional Director
SANDRA J. HARRIS, Associate Regional Director
5670 Wilshire Boulevard, 11th Floor
Los Angeles, California 90036-3648
Telephone: (323) 965-3998
Facsimile: (323) 965-3908

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION


SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

vs.

GARY A. EISENBERG,

Defendant.


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Case No. CV 02-6479 AHM (JTLx)

COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

Plaintiff Securities and Exchange Commission ("Commission") alleges:

JURISDICTION AND VENUE

1. This Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b) and 77v(a), and Sections 21(d)(1) & (e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1) & (e) and 78aa. The defendant, directly or indirectly, made use of the mails, means or instruments of transportation or communication in interstate commerce, or the means or instrumentalities of interstate commerce, in connection with the transactions, acts, practices and courses of business alleged in this Complaint.

2. This Court is an appropriate venue for this action, pursuant to Section 27 ofthe Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of business constituting violations of the laws alleged herein occurred within the Central District of California.

SUMMARY

3. This case involves fraud in the offer and sale of interests in four limited partnerships perpetrated by defendant Gary A. Eisenberg ("Eisenberg"). From about September 1994 to about October 2001, Eisenberg offered and sold interests in the partnerships. Eisenberg raised approximately $21 million from about 200 investors nationwide. He represented to investors that their funds would be used for factoring accounts receivable (i.e., making loans to companies that pledge their accounts receivable as collateral for the loans) for small to medium-sized companies seeking commercial loans. He also promised investors returns that varied by partnership and ranged from 9% to 18%. Moreover, Eisenberg represented to investors that their investments were virtually risk free, that the factoring business was successful and that their investments were yielding positive returns. Although a substantial amount of investor funds were in fact advanced for accounts receivable financing, contrary to Eisenberg's representations the factoring business was not profitable and incurred operating losses from almost the partnerships' inception. As a result of the operating deficit, Eisenberg used investor funds to pay other investors their purported profits and withdrawals of principal. Eisenberg knew as early as 1996 that he was operating a Ponzi-like scheme.

4. No registration statement was filed or in effect with respect to the offer and sale of the securities. The offerings were not exempt from registration.

5. As a result of his conduct, Eisenberg violated the registration provisions of the Securities Act and the antifraud provisions of the Securities Act and the Exchange Act and, unless enjoined, will continue to commit such violations.

DEFENDANT

6. Gary A. Eisenberg, age 64, is a resident of Los Angeles, California. He controlled the activities of the limited partnerships and their general partners, Advance Finance, Inc. and AFI Holding, Inc.

RELATED ENTITIES

7. Advance Finance Partnership ("AFP I"), Advance Finance Partnership II ("AFP II"), Advance Finance Partnership III ("AFP III") and AFI Holding Partnership IV, LP ("AFP IV") (collectively, the "Partnerships"), formerly located in Beverly Hills, California, were California limited partnerships. Eisenberg controlled the Partnerships' operations.

8. Advance Finance, Inc. ("AFI") and AFI Holding, Inc. ("AFHI") (AFI and AFHI are hereinafter sometimes collectively referred to as the "AFI entities"), were incorporated in California and were formerly located in Beverly Hills, California. AFI was the general partner of AFP I, II and III and was the factor/lender for the Partnerships until about June 1997. AFHI was the general partner for AFP IV and was the factor/lender for the Partnerships beginning in about June 1997. AFI and AFHI were both licensed by the California Department of Corporations under the California Finance Lenders Law. Eisenberg was the Chairman of AFI's board of directors and the Chief Executive Officer of AFHI and a member of its board of directors. Eisenberg controlled AFI's and AFHI's operations.

9. On October 22, 2001, the Partnerships, AFI, and AFHI filed for Chapter 11 bankruptcy protection in Los Angeles, California. On November 14, 2001, the Bankruptcy Court authorized the appointment of a trustee to administer the Partnerships', AFI's and AFHI's bankruptcy cases. On July 30, 2002, the bankruptcy cases were converted to Chapter 7 proceedings.

THE FRAUDULENT SCHEME

A. The Securities

10. From about September 1994 until about October 2001, Eisenberg offered and sold securities in the form of interests in the Partnerships to about 200 investors nationwide, including investors in the Central District of California, raising approximately $21 million.

11. Eisenberg represented to investors in the Partnerships that their funds would be used for factoring accounts receivable for small to medium-sized companies seeking commercial loans.

12. Eisenberg represented to investors orally and in writing that the purpose of the Partnerships was to loan the investors' funds to the AFI entities. He told investors that the AFI entities were engaged in the factoring business. Eisenberg further represented that the AFI entities would in turn loan investor funds to clients (borrowers) using the clients' accounts receivable as collateral.

B. The Offer And Sale Of The Investment Interests

13. From approximately September 1994 to about October 2001, Eisenberg offered and sold interests in the Partnerships. The minimum initial investment in the Partnerships was $50,000.

14. Eisenberg offered and sold the securities by soliciting family, friends and acquaintances, who in turn informed relatives and friends of the investment opportunity. Eisenberg also solicited people he encountered through his business and social activities. Additionally, he held at least two meetings for small groups of potential investors where he made presentations describing the investment opportunity.

15. From about September 1994 until about August 1996, Eisenberg offered and sold interests in AFP I to approximately 70 investors, promising them annual returns of 18%. From about February 1996 until approximately mid-1997, Eisenberg offered and sold interests in AFP II to about 35 investors, promising them annual returns of 15%. From about August 1996 until October 2001, Eisenberg offered and sold interests in AFPIII to approximately 100 investors, promising them annual returns of 12%. Between about June 1998 and September 1998, Eisenberg offered and sold interests in AFP IV to 4 investors, promising them annual returns of 9%. Beginning in September 1998, all new investors were required to invest in AFP III, with a promised annual rate of return of 12%. In July 1999, Eisenberg reduced the rate of return for all existing investors in AFP I and AFP II to 12%.

16. Eisenberg raised approximately $7,736,930 from the offer and sale of interests in AFP I; approximately $2,990,575 from the offer and sale of interests in AFP II; approximately $10,624,908 from the offer and sale of interests in AFP III; and approximately $214,408 from the offer and sale of interests in AFP IV.

17. Eisenberg represented to investors that the returns accrued on a monthly basis, but were payable on a quarterly basis. Eisenberg allowed investors to elect a payout or to reinvest the purported earnings in the Partnerships.

18. Each new investor was required to sign a limited partnership agreement and subscription agreement.

19. Eisenberg provided or caused to be provided to many investors an offering document that provided an overview of the investment.

20. Eisenberg pooled investor funds in various bank accounts held in the name of the Partnerships, AFI or AFHI.

21. Eisenberg did not segregate investor funds by partnership but rather co-mingled the funds. He transferred funds between the various accounts as needed.

22. Eisenberg did not segregate the loans made to clients, or the receivables pledged, based on funds provided by one partnership or another.

23. Eisenberg sent or caused to be sent monthly statements to each investor, which included information detailing the purported income earned, income accrued or income reinvested, income withdrawn and income balance for the investor's account.

THE DEFENDANT MADE MISREPRESENTATIONS AND OMISSIONS

OF MATERIAL FACTS IN CONNECTION WITH THE

OFFER AND SALE OF THE INVESTMENTS

24. In connection with the offer and sale of interests in the Partnerships, Eisenberg knowingly misrepresented to investors, among other things, that their investments were virtually risk free and that their investments were yielding positive returns. Eisenberg failed to disclose to investors that he was using investor funds to pay other investors their purported returns and withdrawals of principal.

C. Misrepresentations Regarding the Safety of the Investments

25. Eisenberg made representations to investors orally and in writing that the AFI entities targeted small to medium-sized profitable and growth-oriented companies that were too small to qualify for traditional bank financing. He stated that this gave the AFI entities a niche market to work in with few competitors. He further represented that the quality of these companies' accounts receivable was highly creditworthy, because many of these small to medium-sized businesses provided products and services to larger clients, some of whom were Fortune 500 companies.

26. Moreover, Eisenberg represented to investors, orally and in writing, that the AFI entities' policies provided further protection against risk. Eisenberg stated that the AFI entities' clients were selected very carefully and were thoroughly investigated before the AFI entities agreed to advance funds to them.

27. Furthermore, starting in approximately 1997, Eisenberg began to represent to investors in AFP III and IV, orally and in writing, that their investments were afforded even greater security because the AFI entities had purchased credit insurance to protect against the risk of default on the receivables. In July 1999, Eisenberg notified existing investors in AFP I and II that he was reducing their rate of return to 12% because of the added cost of securing credit insurance.

28. Some of Eisenberg's statements to investors about securing credit insurance confused and misled many investors into believing that their partnership interests wereinsured.

29. Contrary to Eisenberg's representations, however, the assurances Eisenberg gave investors regarding the safety of the investments were false. Except for one or two instances, the AFI entities did not finance receivables from large and well-known companies. The AFI entities also did not always follow their policies and procedures in selecting their clients and in investigating them prior to advancing them funds.

30. In fact, Eisenberg knew as early as 1996 that the AFI entities had extended loans to clients who were not creditworthy and that these accounts had defaulted on repayment of large sums to the AFI entities.

31. Eisenberg also knew that not all of the clients' (borrowers') receivables were protected by credit insurance. Rather, only a small number of AFI's clients had credit insurance coverage for their receivables and for only limited periods of time.

32. Moreover, Eisenberg knew that the AFI entities' employees had extended loans to high credit risk clients in exchange for kickbacks.

33. Eisenberg failed to disclose the facts set forth in paragraphs 29, 30, 31 and 32 to investors while continuing to raise new investor funds.

D. Misrepresentations Regarding the Investment Results

34. Eisenberg made representations to investors, orally and in writing, that their investments were secure and that their accounts were growing, to encourage investors to make new investments.

35. Eisenberg sent or caused to be sent to each investor a monthly statement that provided a summary of the investor's account activity for that month. The statements included the purported income earned, income accrued or reinvested, income withdrawn, and the income balance. In addition, Eisenberg provided or caused to be provided to investors a Schedule K-1, reporting the partners' purported income for the year.

36. Periodically, Eisenberg also sent or caused to be sent to investors a newsletter. The newsletters depicted the AFI entities as operating a growing, profitable business. Eisenberg also represented to investors orally and in other writtencommunications that the AFI entities' factoring business was successful.

37. Contrary to Eisenberg's representations, from almost the inception, the AFI entities were not profitable and incurred operating losses. Eisenberg knew, as early as 1996, that the AFI entities were operating at a substantial deficit.

E. Eisenberg Used Investor Funds to Sustain a Ponzi-Like Scheme

38. Although the AFI entities advanced a substantial amount of investor funds for the purpose of factoring accounts receivable, from almost the inception, they sustained operating losses. By 1996, AFI had incurred operating losses of approximately $4-5 million. Between January 1998 and October 2001, the AFI entities incurred operating losses of approximately $6.5 million.

39. As a result of the operating deficit, Eisenberg used approximately $9.8 million of investor funds, between approximately September 1994 and October 2001, to pay distributions of principal and purported profits to some investors. Eisenberg failed to disclose to investors that he was using their funds to pay other investors their "earnings" and return of principal.

40. Eisenberg knew, as early as 1996, that he was operating a Ponzi-like scheme.

FIRST CLAIM FOR RELIEF

UNREGISTERED OFFER AND SALE OF SECURITIES

Sections 5(a) and 5(c) of the Securities Act

41. Paragraphs 1 through 40 are realleged and incorporated herein by reference.

42. Eisenberg, by engaging in the conduct described in paragraphs 1 through 40 above, directly or indirectly:

    a) made use of means or instruments of transportation or communication in interstate commerce or of the mails to sell securities through the use or medium of any prospectus or otherwise;

    b) carried or caused to be carried through the mails or in interstate commerce, by means or instruments of transportation, securities for the purpose of sale or for delivery after sale; or

    c) made use of means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy, through the use or medium of any prospectus or otherwise, securities.

43. No registration statement has been filed for any of the securities offered and sold by defendant Eisenberg, nor were those offerings exempt from registration.

44. By reason of the foregoing, defendant Eisenberg violated and, unless restrained and enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c).

SECOND CLAIM FOR RELIEF

FRAUD IN THE OFFER OR SALE OF SECURITIES

Section 17(a) of the Securities Act

45. Paragraphs 1 through 40 are realleged and incorporated herein by reference.

46. Eisenberg, by engaging in the conduct described in paragraphs 1 through 40 above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by the use of the mails:

    a) with scienter, employed devices, schemes or artifices to defraud; or

    b) obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

    c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities.

47. By reason of the foregoing, defendant Eisenberg violated and, unless restrained and enjoined, will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a).

THIRD CLAIM FOR RELIEF

FRAUD IN CONNECTION WITH THE PURCHASE

OR SALE OF SECURITIES

Section 10(b) of the Exchange Act and Rule 10b-5

48. Paragraphs 1 through 40 are realleged and incorporated herein by reference.

49. Eisenberg, by engaging in the conduct described in paragraphs 1 through 40 above, directly or indirectly, in connection with the purchase or sale of securities, by the use of the means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter:

    a) employed devices, schemes or artifices to defraud;

    b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; or

    c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons.

    50. By reason of the foregoing, defendant Eisenberg violated and, unless restrained and enjoined, will continue to violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

    PRAYER FOR RELIEF

    WHEREFORE, the Commission respectfully requests that this Court:

    I.

    Issue findings of fact and conclusions of law that defendant Eisenberg committed the violations charged and alleged herein.

    II.

    Issue an order permanently enjoining defendant Eisenberg from violating Sections 5(a), 5(c) and Section 17(a) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.

    III.

    Enter an order requiring Eisenberg to disgorge all ill-gotten gains from his conduct alleged herein, with prejudgment interest thereon.

    IV.

    Order Eisenberg to pay civil penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).

    V.

    Retain jurisdiction of this action in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application for additional relief.

    VI.

    Grant such other and further relief as this Court may determine to be just, equitable and necessary.

    DATED: August 20, 2002

    _____________________
    Nan Prongay
    Attorney for Plaintiff
    Securities and Exchange Commission

    
    
    http://www.sec.gov/litigation/complaints/comp17691.htm

    Modified: 08/23/2002