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U.S. Securities and Exchange Commission

WAYNE M. CARLIN (WC-2114)
REGIONAL DIRECTOR

Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Northeast Regional Office
233 Broadway
New York, NY 10279
(646) 428-1510

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK


SECURITIES AND EXCHANGE COMMISSION,
 
                Plaintiff,
 
        -against-
 
TODD M. EBERHARD,
PARK SOUTH SECURITIES, LLC, and
EBERHARD INVESTMENT ASSOCIATES, INC.,
 
                Defendants,
 
STONE HOUSE CAPITAL PARTNERS LP,
 
                Relief Defendant.

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03 Civ. ____ (  )  
COMPLAINT

 

 

Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against defendants Todd M. Eberhard ("Eberhard"), Park South Securities, LLC ("Park South"), Eberhard Investment Associates, Inc. ("EIA") (collectively, the "Primary Defendants") and relief defendant Stone House Capital Partners LP ("Stone House" or the "Relief Defendant") (the Primary Defendants and Relief Defendant collectively, the "Defendants"), alleges as follows:

SUMMARY OF ALLEGATIONS

  1. The Commission brings this emergency enforcement action charging the Primary Defendants with ongoing fraud, including misappropriation of funds, in connection with certain brokerage accounts under their control. Park South is a registered broker-dealer and investment adviser. Eberhard is a registered representative of Park South and the majority owner of Park South. These two defendants and defendant EIA, another Eberhard entity, have systematically concealed substantial losses in at least one customer's accounts by, among other things, issuing phony customer account statements and making other material misrepresentations about the value of the accounts. At the same time, the Primary Defendants were misappropriating customer funds by moving assets back and forth between the accounts of unrelated customers without knowledge or authority of the customers, and by making unauthorized wire transfers out of a customer's accounts - essentially looting the accounts. Relief Defendant Stone House, which shares Park South's offices, received at least one unauthorized wire transfer from a Park South customer's account, a transfer that was directed by Eberhard.

VIOLATIONS

  1. By virtue of the foregoing conduct:
     
    1. The Primary Defendants, directly or indirectly, singly or in concert, have engaged and are engaging in acts, practices and courses of business, that constitute violations of Section 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77q(a).
       
    2. The Primary Defendants, directly or indirectly, singly or in concert, have engaged and are engaging in acts, practices and courses of business that constitute violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
       
    3. Relief Defendant Stone House obtained funds from at least one Park South customer under circumstances in which it is not just, equitable, or conscionable for Relief Defendant Stone House to retain those funds. As a consequence of the foregoing, Relief Defendant Stone House has been unjustly enriched.
       
  2. Unless the Primary Defendants are preliminarily and permanently restrained and enjoined, they will continue to engage in the acts, practices and courses of business set forth in this Complaint and in acts, practices and courses of business of similar type and object.

JURISDICTION AND VENUE

  1. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b) and Section 21(d)(1) of the Exchange Act, 15 U.S.C. § 78u(d)(1), seeking to restrain and enjoin permanently the Primary Defendants from engaging in the acts, practices and courses of business alleged herein.
     
  2. The Commission also seeks, as immediate relief, a temporary restraining order and asset freezes against all Primary Defendants and any of their customers' assets that have been transferred to the Relief Defendant, an order appointing a temporary and permanent receiver for Park South and EIA, verified accountings by all Defendants, expedited discovery and an order preventing the destruction of documents.
     
  3. Finally, the Commission seeks a judgment ordering all Defendants to disgorge ill gotten gains with prejudgment interest thereon, and ordering the Primary Defendants to pay civil money penalties pursuant to Section 20(c) of the Securities Act, 15 U.S.C. § 77t(c) and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
     
  4. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a) and Sections 21(e) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(e) and 78aa.
     
  5. The Primary Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. Certain of these transactions, acts, practices and courses of business occurred in the Southern District of New York, including meetings in New York City between Eberhard and a Park South customer at which Eberhard delivered phony account statements and made other material misrepresentations concerning the value of the customer's account.

THE DEFENDANTS

  1. Eberhard age 39, is a general securities principal and representative of Park South. He is also the majority owner of Park South. Eberhard has Series 7, 24, 63 and 65 licenses. He was a regular guest on television talk shows addressing financial matters, such MoneyLine and similar programs. On July 23, 2002, the NASD filed regulatory proceedings against Eberhard alleging, among other things, illegal switching and issuance of false account statements in connection with four customer accounts. As a result of the NASD investigation, Eberhard's amended Form U-4 now discloses a total of 20 customer complaints against him (including the four at issue in the NASD proceedings) that were either made or settled between 2000 and the end of 2002. All of the complaints are similar in nature. Twelve of the 20 have been settled. All of the settlements contain a confidentiality clause prohibiting disclosure of the settlement except under legal compulsion. Eberhard first became registered as a general securities representative in March 1987. In 1999, Eberhard was advising clients through EIA, for which he was Chief Executive Officer. From November 1998 through December 2001, Eberhard was also registered both as a general securities principal and a general securities representative employed by Clearing Services of America, Inc. ("Clearing Services"). In this time period, Eberhard solicited and received funds from clients on behalf of EIA and used Clearing Services as the broker-dealer. Eberhard transferred some or all of EIA's accounts to Park South in late 2001. Eberhard has residences in New York City and Millbrook, NY.
     
  2. Park South is a broker-dealer and investment adviser registered with the Commission. Park South holds itself out as "an investment advisory/portfolio management firm that was founded in 1983 and became a NASD member firm in 1999." The firm's website claims that it has over $2 billion in assets under management and 14 full-time financial consultants. Park South's corporate offices are located in Iselin, NJ. The firm also has branch offices in New York, NY, Melville, NY, and Dallas, TX. The value of Park South's customer accounts currently is $77 million. There currently are 2,278 customer accounts.
     
  3. EIA is a New York domestic business corporation formed in 1988. It is or was an investment advisory firm purporting to render investment advice for the trading of securities and general advice regarding investment strategies and financial planning for the accounts of its customers. At all relevant times, EIA had its principal place of business in New York, NY. EIA was not a registered investment adviser or broker-dealer.

RELIEF DEFENDANT

  1. Stone House is a New York general partnership formed in 2000 by Michael Rutigliano and John Michael Xirinachs ("Xirinachs") as general partners. Xirinachs is a registered representative with Park South in the firm's Melville, NY office. Stone House purports to be a hedge fund. It shares offices with Park South at Park South's Melville, NY address.

BACKGROUND

  1. The Commission brings this emergency action because Eberhard and his companies have systematically been defrauding at least one substantial customer, Robert Pellegrini ("Pellegrini"), and probably many others. From at least mid-2000 and continuing to at least last week, Eberhard has made repeated material misrepresentations to Pellegrini, including by issuing numerous phony account statements, concealing the true value of Pellegrini's accounts, which, unbeknownst to Pellegrini, had declined in value from $12 million in 1999 to about $1.6 million in December 2002. The Primary Defendants also looted Pellegrini's accounts of nearly $1 million in 2002 alone. That conduct may be continuing.
     
  2. On the basis of charges the NASD recently filed against Eberhard, it also appears that these fraudulent practices may be pervasive. The NASD's separate administrative proceeding against Eberhard, brought in July 2002, alleges similar frauds in connection with four other customer accounts. Moreover, the Central Registration Depository identifies 16 additional customer complaints against Eberhard, all raising similar issues. As part of its relief in this action, the Commission is seeking expedited discovery to attempt to determine the extent of the ongoing fraud.

A. Misrepresentations and Phony Account Statements

  1. Pellegrini is a 64 year-old graphic artist, who owns and operates two businesses, a graphic design firm, known as Pellegrini & Associates, and a Long Island winery. Pellegrini is an unsophisticated investor, who essentially gave all of his money to Eberhard to manage in Eberhard's discretion.
     
  2. Pellegrini's relationship with Eberhard began in March or April 1999 when Pellegrini was dissatisfied with the investment performance of his portfolio. On the recommendation of Pellegrini's personal trainer, Pellegrini interviewed Eberhard, who was then a television personality, making regular appearances on financial talk shows. In April 1999, Pellegrini began transferring assets to EIA, which Eberhard transferred to Park South in late 2001. By the end of July 1999, Pellegrini had transferred essentially all of his assets, about $12 million, in three separate accounts: separate IRA accounts for himself and his wife and a non-IRA account that contained the bulk of the money, about $9 million.
     
  3. Through August 2000, Pellegrini's account balances fluctuated above and below $12 million, but were relatively stable. The value began to decline in August 2000. At December 31, 2000, the true combined balances were $9.385 million. By December 31, 2001, Pellegrini's true combined balances had dropped to about $6 million, and at December 31, 2002, the true combined balances were just $1.6 million.
     
  4. Throughout this period, Pellegrini met with Eberhard regularly to discuss his account and, at each meeting, Eberhard furnished Pellegrini a phony statement of his holdings, which always showed a combined balance of $11 million or more. The December 12, 2000 statement, for example, showed a combined balance of $12 million, as did the December 2001 statement. Similarly, the statements Eberhard provided throughout 2002 consistently showed a balance of more than $11 million.
     
  5. Eberhard also made misrepresentations to Pellegrini concerning monthly statements Pellegrini received from Park South's and EIA's respective clearing firm. The clearing firm statements showed the true value of Pellegrini's accounts. However, Eberhard explained away discrepancies between the clearing firm statements and the phony statements by telling Pellegrini that the balances in the clearing firm statements did not reflect "trades not settled," and that those trades made up the difference. Pellegrini relied on Eberhard's phony account statements.
     
  6. For example, shortly after receiving statements from the clearing firm dated April 28, 2001, which showed combined balances of only about $8.2 million, Pellegrini met with Eberhard to discuss his accounts. Eberhard assured Pellegrini that his portfolio had not declined in value. He walked Pellegrini through the clearing firm statements, highlighting several numbers that he told Pellegrini needed to be added together to come up with the account value. The sum of the highlighted numbers was approximately $11.6 million, which was consistent with the balance contained in the phony Eberhard statements.
     
  7. On numerous other occasions Eberhard told Pellegrini that any deficit could be reconciled by adding in the trades not settled, and whenever Pellegrini added those trades to the account balance in the real statements, the sum would approximate the balance in the phony Eberhard statements. At one point, Pellegrini even expressed frustration to Eberhard about the volume of month-end trades Eberhard routinely made because such unsettled trades made it so difficult for Pellegrini to calculate the real value of his accounts.
     
  8. Eberhard's representation to Pellegrini that he needed to add back the trades not settled in order to arrive at the true account value was false. Trades "not settled" were already accounted for in the clearing firm account balance.
     
  9. Pellegrini nonetheless believed Eberhard's explanations until he received his December 31, 2002 statements from the clearing firm, which together totaled only $1.6 million. Even when Pellegrini added back the trades not settled, he still came up with a substantial deficit, prompting him to call Eberhard during the week of January 20, 2002. This time, Eberhard explained that he had moved $9.7 million out of the brokerage accounts to Stone House, which he claimed was an unaffiliated San Francisco-based hedge fund that held $1.6 billion in Eberhard customer funds. This representation was false. Stone House operated out of Park South's offices in Melville, NY. Moreover, at December 31, 2002, it had total account assets of about $1.75 million in two accounts with Banc of America Securities, LLC ("BOA"), one a contribution account (apparently a control account) and one a prime brokerage account. Those assets were first deposited in December 2002. Prior to December 2002, the Stone House accounts had no assets.
     
  10. To reassure Pellegrini, Eberhard produced a fax of what purported to be a BOA printout containing summary data for two Stone House accounts containing $9.7 million. Eberhard told Pellegrini that those assets were his. However, the printout did not contain Pellegrini's name, and Pellegrini asked for proof that the account was his. Eberhard eventually produced faxes of two separate BOA account statements totaling about $9.4 million. Each statement contained Pellegrini's name and address. Pellegrini asked to see the originals, but Eberhard told him that those were in California.
     
  11. The BOA printout and account statements were fabrications. Eberhard apparently used the two Stone House account statements as templates, typing in Pellegini's name and balances totaling $9.4 million. Eberhard could not provide originals to Pellegrini because that would have revealed the alterations. There is no Pellegrini account at BOA. Moreover, the only Stone House accounts at BOA are the two accounts alleged above having a 2002 year-end value of $1.722 million. Of that $1.722 million Stone House balance, $250,000 did come from Pellegrini's IRA account at Park South, but as a distribution, not as an IRA rollover.
     
  12. During the week of January 27, 2002, Eberhard called Pellegrini and told him that, because of Pellegrini's concerns about the Stone House accounts, Eberhard was in the process of liquidating all assets in those accounts, except for $500,000. Eberhard advised that the money would be wired to Pellegrini's Park South accounts by Wednesday, February 5. Eberhard has also scheduled a meeting with Pellegrini on February 5.

B.Misappropriations of Pellegrini's Funds

  1. In addition to issuing phony account statements and making other material misrepresentations, the Primary Defendants have misappropriated Pellegrini's funds. In 2002, there were nearly $1 million in unauthorized transfers out of Pellegrini's Park South accounts, not including the $250,000 transfer to Stone House. About $500,000 was wired to persons or entities not known to Pellegrini. There were also four transfers, totaling $825,000, to other Park South customers, which were accomplished by simple journal entries on the clearing firm's books. Of these journaled funds, about $431,000 was subsequently journaled back into Pellegrini's accounts.
     
  2. In the NASD investigation, the NASD uncovered similar evidence of journal entry transfers between other of Eberhard's customers' accounts. Based on this, it appears that the Primary Defendants misappropriated funds of Park South customers before 2002.

ALLEGATIONS AS TO RELIEF DEFENDANT

  1. On December 20, 2002, Stone House received, by wire transfer to its BOA contribution account, at least $250,000 from Pellegrini's Park South IRA account. That money was derived directly or indirectly from the illegal conduct alleged above. Stone House is an entity that shares office space with Eberhard and Park South, and its principal general partner, Xirinachs, is a registered representative with Park South. Eberhard and Park South transferred this money to Stone House without any consideration. As a result, Eberhard and Park South unjustly enriched Stone House. Stone House has no just claim to this property, which belongs to Pellegrini.

FIRST CLAIM FOR RELIEF
Violations of Section 17(a)(1) of the Securities Act

  1. Paragraphs 1 through 29 are realleged and incorporated by reference as if set forth fully herein.
     
  2. From at least the middle of 2000 through the present, the Primary Defendants, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce or by the use of the mails, directly and indirectly, have employed and are employing devices, schemes and artifices to defraud.
     
  3. The Primary Defendants knew or were reckless in not knowing of the activities described above.
     
  4. By reason of the activities herein described, the Primary Defendants have violated and are violating Section 17(a)(1) of the Securities Act [15 U.S.C. §77q(a)(1)].

SECOND CLAIM FOR RELIEF
Violations of Section 17(a)(2) and 17(a)(3) of the Securities Act

  1. Paragraphs 1 through 29 are realleged and incorporated by reference as if set forth fully herein.
     
  2. From at least the middle of 2000 through the present, the Primary Defendants, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce or by the use of the mails, directly and indirectly, have obtained and are obtaining money and property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and have engaged and are engaging in transactions, practices or courses of business which have operated and will operate as a fraud and deceit upon Pellegrini.
     
  3. By reason of the activities herein described, the Primary Defendants have violated and are violating Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §77q(a)(2) and §77q(a)(3)].

THIRD CLAIM FOR RELIEF
Violations of Section 10(b) of the
Exchange Act and Rule 10b-5

  1. Paragraphs 1 through 29 are realleged and incorporated by reference as if set forth fully herein.
     
  2. From at least the middle of 2000 through the present, the Primary Defendants, in connection with the purchase and sale of securities, directly and indirectly, by the use of the means and instrumentalities of interstate commerce or of the mails, have employed and are employing devices, schemes and artifices to defraud; have made and are making untrue statements of material fact and have and are 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; and have engaged and are engaging in acts, practices and courses of business which operated as a fraud and deceit upon Pellegrini.
     
  3. Defendants knew or were reckless in not knowing of the activities described above.
     
  4. By reason of the activities herein described, the Primary Defendants have violated and are violating Section 10(b) of the Exchange Act [15 U.S.C. §§78j(b)] and Rule 10b-5 [17 C.F.R. §240.10b-5] promulgated thereunder.

FOURTH CLAIM FOR RELIEF
Unjust Enrichment of Relief Defendant Stone House

  1. Paragraphs 1 through 29 are realleged and incorporated by reference as if set forth fully herein.
     
  2. Relief Defendant Stone House was unjustly enriched by Eberhard's and Park South's December 20, 2002 wire transfer of $250,000 to Stone House's BOA account from Pellegrini's Park South IRA, which itself had been obtained as a result of the Primary Defendants' illegal conduct.
     
  3. Relief Defendant Stone House did not provide consideration for the money transferred to it from Pellegrini's Park South IRA.
     
  4. Relief Defendant Stone House obtained funds from Pellegrini's Park South IRA under circumstances in which it is not just, equitable, or conscionable for Relief Defendant Stone House to retain those funds. As a consequence of the foregoing, Relief Defendant Stone House has been unjustly enriched.

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that the Court grant the following relief:

I.

A Final Judgment permanently enjoining the Primary Defendants, their agents, servants, employees and 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) 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, 17 C.F.R. § 240.10b-5.

II.

A Final Judgment ordering all defendants to disgorge their ill-gotten gains, plus prejudgment interest, and such other and further amount as the Court may find appropriate.

III.

A Final Judgment ordering the Primary Defendants to pay civil money 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).

IV.

Pending the disposition of this action, an Order temporarily and preliminary enjoining the Primary Defendants, their agents, servants, employees and 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) 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, 17 C.F.R. § 240.10b-5.

V.

An Order directing each of the Defendants to file with this Court and serve upon the Commission, within three (3) business days, or within such extension of time as the Commission agrees to, a verified written accounting, signed by each said Defendant under penalty of perjury, setting forth:

(1)  All assets, liabilities and property currently held directly or indirectly by or for the benefit of the Primary Defendants, including but not limited to bank accounts, brokerage accounts, investments, business interests, loans, lines of credit, and real and personal property wherever situated, describing each asset and liability, its current location and amount;
(2)  All money, property, assets, and other income received by the Primary Defendants, or for their direct or indirect benefit, in or at any time from April 1, 1999 to the date of the accounting, describing the source, amount, disposition and current location of each of the items listed;
(3)  All assets, funds, securities, real or personal property of customers of the Primary Defendants, transferred to or for the benefit of the Primary Defendants in or at any time from April 1, 1999 to the date of the accounting, and the disposition by the Primary Defendants of such assets, funds, securities, real or personal property;
(4)   All money, property, assets and other income transferred from the Primary Defendants, including transfers to any bank account, brokerage account or other account, or to any individual, or entity, in or at any time from April 1, 1999 to the date of the accounting;
(5)  All money, property, assets and other income transferred from the Primary Defendants to Relief Defendant Stone House in or at any time from April 1, 1999 to the date of the accounting, and the disposition by the Relief Defendant Stone House of such assets, funds, securities, real or personal property; and
(6)  The names and last known addresses of all bailees, debtors, and other persons and entities which are currently holding the assets, funds or property of the Primary Defendants.

VI.

An Order temporarily and permanently appointing a receiver to take possession of the assets of Park South and EIA in order to: (1) preserve the status quo, (2) ascertain the true financial condition of said defendants and the disposition of customer funds, (3) prevent misappropriation or misuse of customer funds and of corporate property and assets, (4) preserve park South's and EIA's books, records, and documents, (5) be available to respond to customer inquiries and (6) prevent the encumbrance or disposal of customer funds and of corporate property and assets

VII.

An Order directing the Primary Defendants, their agents, banks, debtors, bailees, servants, employees, and attorneys-in-fact, and those persons in active concert or participation with the Primary Defendants who receive actual notice of said Order by personal service, facsimile, or otherwise, and each of them, to hold and retain within their control, and otherwise prevent any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any of the Primary Defendants' assets, funds or other properties of any kind wherever situated and assets over which said defendants have control by signatory authority or otherwise.

VIII.

An Order directing the Relief Defendant, its agents, banks, debtors, bailees, servants, employees, and attorneys-in-fact, and those persons in active concert or participation with the Relief Defendant who receive actual notice of said Order by personal service, facsimile, or otherwise, and each of them, to hold and retain within their control, and otherwise prevent any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any assets, funds or other properties of any kind, wherever situated, belonging to, transferred from or otherwise traceable to customers of the Primary Defendants.

IX.

An Order permitting expedited discovery.

X.

An Order enjoining and restraining each of the Defendants, and any person or entity acting at their direction or on their behalf, from destroying, altering, concealing, or otherwise interfering with the access of the Commission to relevant documents, books and records.

XI.

Granting such other and further relief as to this Court seems just and proper.

Dated:    New York, New York
February 5, 2003
  By: __________________________________
      Wayne M. Carlin (WC-2114)
 
Regional Director
Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
233 Broadway
New York, NY 10279
(646) 428-1510

Of Counsel:
 
Edwin H. Nordlinger
Barry W. Rashkover
David Rosenfeld Andrew M. Calamari
Ken C. Joseph
Laura V. Yeu

 

http://www.sec.gov/litigation/complaints/comp17969.htm

Modified: 02/05/2003