Wayne M. Carlin (WC-2114 )
Attorney for Plaintiff
United States District Court
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against defendants Dominique S. Alvieri ("Alvieri") and Diversified Financial Corporation ("Diversified"), alleges as follows:
Preliminary Statement1. In this action, the Commission charges Alvieri, an unregistered investment adviser, and Diversified, a company that Alvieri controlled, with perpetrating a securities fraud targeted at ethnic Croatians residing in northern New Jersey. Between December 1996 and March 1999, Alvieri and Diversified induced at least three advisory clients - all ethnic Croatians - to purchase a total of at least $555,800 of shares of two investment funds, the "Diversified Financial Fund" ("Financial Fund") and the "Diversified Equity Fund, Inc." ("Equity Fund") (collectively, the "Funds"). Alvieri represented to the clients that as manager of the Funds' portfolio of securities, he would invest all of the client proceeds in publicly traded securities. In fact, the Funds did not exist and Alvieri misappropriated most of the clients' investment proceeds. None of the $555,800 raised was invested, or otherwise used for the benefit of the supposed Funds or his clients. To induce additional investments in the Funds and conceal the fraud, Alvieri and Diversified provided the clients with falsified monthly account statements that baselessly reported that the Funds were generating steady returns, and told at least one client that his investment was on deposit in a Financial Fund account at a broker-dealer that, in truth, did not exist. Beginning in March 1999, Alvieri stopped providing monthly account statements, failed to return any client proceeds, and ultimately fled the United States.
2. Alvieri and Diversified, directly or indirectly, have 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 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. §§ 80b-6(1), 80b-6(2). Unless Alvieri and Diversified are permanently restrained and enjoined by this Court, they will continue to engage in the transactions, acts, practices, or courses of business alleged in this Complaint, and in transactions, acts, practices, or courses of business of a similar type and object.
Jurisdiction and Venue
3. The Commission brings this action against Alvieri and Diversified pursuant to the authority conferred upon it by Sections 20(b) and (d) of the Securities Act, 15 U.S.C. § 77t(b) and (d), Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and Sections 209(d) and (e) of the Advisers Act, 15 U.S.C. § 80b-9(d) and (e). The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and an accounting. The Commission also seeks the imposition of civil money penalties under 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(e)(1) of the Advisers Act, 15 U.S.C. § 80b-9(e)(1).
4. Alvieri and Diversified, directly or indirectly, made use of the means or instruments of transportation or communication in, and the means or instrumentalities of, interstate commerce, or the mails, or of the facilities of a national securities exchange, in connection with the transactions, acts, practices, or courses of business alleged herein.
5. Certain of the defendants' transactions, acts, practices, or courses of business alleged herein took place within the Southern District of New York, including: (a) depositing advisory client monies fraudulently received for the Funds into brokerage accounts at registered broker-dealers located in the Southern District of New York, and (b) effecting for defendants' benefit the purchase or sales of securities in those brokerage accounts. Accordingly, this Court has jurisdiction over this action, and venue is proper in this district, pursuant to Sections 20(d) and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(d), 77v(a), Sections 21(d), 21(e), and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d), 78u(e), 78aa, and Section 214 of the Advisers Act, 15 U.S.C. § 80b-14.
6. Alvieri is 34 years old and resided in Little Ferry, New Jersey, during the time of the conduct alleged herein. He is Diversified's Chief Executive Officer and controlled Diversified's operations from his New Jersey home.
7. Diversified was incorporated by Alvieri in the Cayman Islands on May 7, 1996, and was the entity through which Alvieri conducted his investment advisory business. Diversified is not registered with the Commission under the Advisers Act or the Investment Company Act of 1940. Diversified had no physical location other than Alvieri's home and no employees other than Alvieri.
Alvieri's and Diversified's Fraudulent Conduct
(Defendants' Sale of the Funds' Shares)
8. Between approximately late 1996 and 1999, Alvieri and Diversified held themselves out as investment advisers to members of the Croatian community residing in or about Hudson County, New Jersey. Alvieri and Diversified agreed to invest client funds in return for a percentage of the investment profits. Alvieri and, through Alvieri, Diversified told clients that the securities they were purchasing were shares or other interests in either the Financial Fund or the Equity Fund, which in some instances Alvieri described as hedge funds. To at least one investor, Alvieri described the Equity Fund as an `investment company' under Section 3(a) of the Investment Company Act of 1940. Alvieri and, through Alvieri, Diversified told their clients that he and Diversified were the advisers to the Funds and that, through the Funds, he and Diversified would invest the clients' money in publicly traded securities. Between December 1996 and March 1999, Alvieri and Diversified induced at least three clients, two brothers, Investor A and Investor B, and their niece, Investor C, to purchase a total of at least $555,800 of shares of one of the two Funds.
(Defendants' Misrepresentations in Selling the Funds' Shares)
9. To induce their advisory clients to invest in the Equity Fund and the Financial Fund, Alvieri and Diversified made the following misrepresentations:
(a) First, Alvieri and Diversified told investors that the investors' assets would be invested in the Equity Fund or the Financial Fund when Alvieri and Diversified knew that (i) neither the Financial Fund nor the Equity Fund existed and (ii) Alvieri and Diversified intended systematically to misappropriate clients' investment proceeds shortly upon their receipt by using those proceeds for their own benefit or to purchase securities in the name of Diversified, not the clients or the Funds.
(b) Second, Alvieri and Diversified sent clients falsified monthly statements that reported wholly fictitious investment returns and, in some cases, identified fictitious stock trades. Alvieri knew that these monthly statements were false because he and Diversified had not invested client funds as they represented and had misappropriated those funds for their own benefit. After receiving these falsified statements, at least two investors transferred additional proceeds to Alvieri for investment in the Equity Fund.
(c) Third, Alvieri told at least one investor that his investment proceeds were on deposit in an account of the Financial Fund at "General Securities, PLC," ostensibly a registered broker-dealer where Alvieri claimed he worked as a registered representative. These representations were knowingly false because Alvieri was not a registered representative of "General Securities, PLC," and no such broker-dealer even existed.
10. For example, in December 1996, Alvieri induced Investor A to purchase $334,000 worth of shares in the Financial Fund. Alvieri told Investor A that Alvieri and Diversified would act as Investor A's investment advisers and-through the Financial Fund-would invest Investor A's $334,000 in various publicly traded securities. As compensation for his services, Alvieri requested, and Investor A agreed to pay, an annual advisory fee to Alvieri and Diversified of 10% of Investor A's profits on his Financial Fund investment.
11. Alvieri and Diversified did not invest Investor A's December 1996 $334,000 investment as they represented. Instead, Alvieri diverted Investor A's $334,000 for his or Diversified's own benefit. Specifically, in December 1996, Alvieri deposited Investor A's $334,000 into two accounts in the name of Diversified at Barclays Bank in the Cayman Islands ("Barclays") and, over the next few months, used $219,000 of these funds for his own benefit by, among other things, (i) issuing drafts totaling $57,378 to himself and his father, (ii) making payments totaling $12,108 to American Express and Citibank, and (iii) transferring $50,000 to a separate fixed-rate, interest bearing savings account. Defendants also used about $115,000 of Investor A's $334,000 for securities trades for their own benefit - not for the Financial Fund or Investor A - and soon depleted that money through trading losses.
12. Between approximately December 1996 and March 1999, Alvieri provided Investor A with monthly account statements that purported to calculate a month-end net asset value for the Financial Fund and falsely represented that the value of Investor A's shares in the Financial Fund was steadily increasing. The March 1999 account statement indicated, for example, that Investor A's $334,000 investment had grown in value to over $3,400,000. After receiving fourteen of these falsified Financial Fund statements, Investor A made further investments through Alvieri in the Equity Fund in February 1998; after receiving still thirteen more falsified Financial Fund statements, Investor A made further investments through Alvieri in the Equity Fund in March 1999, as explained below.
13. In February 1998 and March 1999, Alvieri induced Investor A and Investor B to buy a total of $160,000 of interests in the Equity Fund. Specifically, in February 1998, Investor A and Investor B respectively gave Alvieri $40,000 and $30,000 to buy shares of the Equity Fund. In March 1999, Investor A and Investor B respectively gave Alvieri an additional $40,000 and $50,000 for shares of the Equity Fund. Alvieri represented to Investor A and Investor B that their investment proceeds would be placed in an Equity Fund brokerage account at Spear Leeds & Kellogg ("Spear Leeds"), a registered broker-dealer located in New York. Alvieri further told Investor A and Investor B that, in exchange for his advisory services, Alvieri would pay himself an annual advisory fee of 10% of Investor A's and Investor B's profits on their Equity Fund investment.
14. Alvieri and Diversified did not deposit the $160,000 given to them by Investor A and Investor B in an Equity Fund account at Spear Leeds as they represented. Spear Leeds had no account in the name of the Equity Fund. Instead, in February 1998, Alvieri placed $70,000 of the $160,000 into an account in the name of Diversified at Andover Brokerage, LLC ("Andover"), a registered broker-dealer in New York. Although Alvieri initially invested all of the $70,000 in securities, within six weeks, he liquidated $45,000 of those securities and withdrew the proceeds in cash. He depleted through trading losses the remaining $25,000 in securities by April 1998. Between April 1998 and October 1998, there was no trading activity in the Andover account, which was closed in October 1998. The remainder of Investor A and Investor B's $160,000, or $90,000, never was deposited into an Equity Fund account at Spear Leeds and has not been located. Alvieri and Diversified collected advisory fees from Investor A and Investor B by misappropriation.
15. Between February 1998 and February 1999, Alvieri provided Investor A and Investor B with statements that purported to be on Spear Leeds letterhead and show various trades that Alvieri was executing on behalf of the Equity Fund. The February 1999 account statement indicated that Investor A's and Investor B's respective investments had increased in value to an aggregate of over $354,000. Investor A and Investor B each received thirteen Equity Fund statements before making additional Equity Fund investments in March 1999. These statements were false because Spear Leeds did not issue them, the trades they described did not occur, and the stated account values were false.
16. In September 1998, upon her uncles' advice, Investor C approached Alvieri and asked him to invest her money in publicly traded securities through the Funds. Investor C specifically directed Alvieri not to invest any of her money in foreign securities and told him that she needed to redeem her investment in approximately four years when she would begin paying her son's college tuition. When Alvieri agreed to Investor C's requests, she gave him a check for $61,804.04 payable to Diversified to invest in shares of the Equity Fund and executed a written agreement with Diversified pursuant to which Diversified agreed "to invest [that sum] in a segregated account for the sole benefit of the client" and to use its "best efforts" when managing Investor C's money, and Investor C agreed to pay 5% "net" to Alvieri. Alvieri told Investor C that, through the Equity Fund's brokerage account at Spear Leeds, he would invest her assets in publicly traded, domestic securities.
17. Alvieri never deposited Investor C's $61,804 in an Equity Fund account at Spear Leeds, and the monthly account statements provided to Investor C were false and never issued by Spear Leeds. The funds given to Alvieri by Investor C have not been located. Alvieri and Diversified collected an advisory fee from Investor C by misappropriation.
18. Between September 1998 and February 1999, Alvieri provided Investor C with monthly account statements that purported to be on Spear Leeds letterhead and show that her approximately $61,804 investment in the Equity Fund had increased in value to over $106,000 by February 1999. These monthly statements were false because Spear Leeds did not issue them, there was no Equity Fund account at Spear Leeds, and Investor C's investment proceeds had been misappropriated.
19. In late March 1999, Alvieri and Diversified stopped providing monthly account statements and failed to return client funds. Thereafter, Alvieri fled the United States.
Claims For Relief
First Claim for Relief
Violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), 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
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