GREGORY C. GLYNN, Cal. Bar No. 039999
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
JURISDICTION AND VENUE
1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) & 77v(a), Sections 21(d)(3)(A), 21(e) and 27 of theSecurities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(3)(A), 78u(e) & 78aa, Sections 209(e)(1) and 214 of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. §§ 80b-9(e)(1) & 80b-14, and Sections 42(d), 42(e)(1) and 44 of the Investment Company Act of 1940 ("Investment Company Act"), 15 U.S.C. §§ 80a-41(d), 80a-41(e)(1) & 80a-43. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged in this Complaint.
2. Venue is proper in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), Section 27 of the Exchange Act, 15 U.S.C. § 78aa, Section 214 of the Advisers Act, 15 U.S.C. § 80b-14, and Section 44 of the Investment Company Act, 15 U.S.C. § 80a-43, because certain of the transactions, acts, practices and courses of conduct constituting violations of the federal securities laws occurred within this District.
3. This matter involves an affinity fraud perpetrated primarily upon members of the Armenian-American community by National Investment Enterprises, a.k.a. National Enterprises, Inc. ("NIE"), a purported private money management company that is no longer in operation, and its founder and CEO, Melkon Gharakhanian, a.k.a. Michael Garian, a.ka. Bika Balian ("Garian"). Between 1997 and mid-2001, Garian and NIE sold interests in an investment pool, raising over $19 million from about 200 investors, at least one of whom was located out of state. Investors were told by Garian that, at his discretion, he would use their money to purchase various securities for their accounts. To bring new investors into NIE, Garian falsely represented that he had an "inside line" to upcoming "hot" IPOs, particularly for Internet and other technology-related companies, and could deliver large profits to investors quickly.
4. Garian and NIE sent investors monthly written statements that falsely represented that NIE was purchasing large volumes of IPO shares and other securities, and that NIE was making profits from Garian's trading activities. Garian used less than one-third of the money raised on investments in IPOs, day trading, and commodities trading. Of the $5.2 million of investor funds that Garian actually invested, he lost all but $1.6 million. Another $750,000 was transferred to one of NIE's commodities brokers, Aegis Financial LLC ("Aegis"), in the form of a subordinated loan. Most of the investor funds, approximately $14.1 million, were used to fund investor withdrawals so that Garian and NIE could run a Ponzi-like scheme.
5. By the beginning of 2001, Garian's unsuccessful investments combined with investor withdrawals resulted in the depletion of NIE's investor funds, and caused NIE to bounce several checks to investors. In all, NIE's investors have lost nearly $5 million. NIE ceased collecting funds from investors by April 2001.
6. Defendants NIE and Garian, by engaging in the above conduct, have violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and (c). The Defendants have also violated the antifraud provisions 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, and Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2).
7. Defendant NIE, by engaging in the above conduct, has violated the registration provisions of Section 7(a) of the Investment Company Act, 15 U.S.C. § 80a-7(a).
8. NIE was incorporated in California in March 1997. Its offices were located in Glendale, California. NIE purported to be a private money management company. NIE is not registered in any capacity with the Commission. In July 2000, the California Franchise Tax Board suspended NIE's corporate status for failure to pay taxes.
9. Garian, age 41, resides in Van Nuys, California. In February 1997, Garian declared personal bankruptcy. Garian has used the alias "Bika Balian" ("Balian") in his operation of NIE. Balian is listed as NIE's registered agent and sole shareholder. Garian also signed NIE checks using the name Balian. Garian is not registered in any capacity with the Commission or the National Association of Securities Dealers ("NASD").
THE RELIEF DEFENDANT
10. Aegis is a commodities firm located in Chicago and is registered with the National Futures Association ("NFA") as an introducing broker.
THE FRAUDULENT SCHEME
11. From March 1997 through July 2001, NIE operated as a purported private money management firm. Garian founded and operated NIE. Garian and a few clerical workers were NIE's only employees. Garian controlled NIE and made all major decisions concerning NIE's operations and investments. At least four other individuals used NIE's office space and acted as NIE's "finders." These finders helped NIE and Garian recruit new investors. Garian trained the finders.
B. The Investment and NIE and Garian's Sales Efforts
12. Garian and NIE solicited funds by use of the mails and telephones, as well as by word of mouth in Glendale, California's Armenian-American community, one of the largest such communities in the United States.
13. Many of NIE's investors had never invested in the stock market, and several were Armenian immigrants for whom English was a second language. Most new investors found out about NIE from friends and relatives who had invested money with NIE and were pleased with the large gains their portfolios appeared to have made. New investors met with either Garian or one of NIE's finders.
14. Garian told potential investors that he would use their money to purchase various financial instruments, with an emphasis on technology stocks and IPOs. These investors acted upon Garian's advice to invest in upcoming IPOs of technology stocks that he claimed to be able to purchase at the offering price. NIE's investors left all investment decisions up to Garian.
15. Garian, or one of his finders, told new investors that their account would be handled personally by Garian, a self-described "master of the S&P 500." Garian explained that he had an "inside line" to newly issued IPOs, that he could purchase shares of these IPOs at their initial offering price, before they were offered to the public, and that he could quickly sell them for a sizable profit. Further, Garian told new investors that he was involved with "smart money" (i.e., large mutual fund advisers, investors from large Wall Street firms, etc.) and "people in the know" and could double an investor's money quickly.
16. One investor was told by Garian that the average investment return was 40% after taxes and management fees. Garian also boasted to new investors that NIE's staff had a combined investment experience of fifty years. Garian told at least one new investor that NIE was operating as a licensed brokerage firm, and that it "did not lose money." Garian failed to disclose to investors his February 1997 personal bankruptcy filing.
17. Garian sent new investors an application and agreement ("Investor Agreement") with NIE in which the investor granted NIE the "full and unfettered right to invest in such financial markets and instruments as [NIE] deems advisable in its sole discretion." The Investor Agreement further disclosed that NIE could invest their funds in "such diverse instruments as stocks, bonds, commodities,options, financial indices, options on indices, American Depository Receipts, and domestic and international mutual funds."
18. According to the Investor Agreement, NIE assessed two monthly fees. The first was a monthly management fee that varied between 1-2% of principal. The other was a net profit fee that varied between 28-35% of an investor's monthly profits, depending on the investment returns for that month. To further the scheme, Garian told new investors that, in exchange for referring new investors, NIE would reduce or even waive its monthly net profit fee, depending upon how many new investors that investor could bring into NIE. Although investor account statements reflected that these fees were being assessed on a monthly basis, Garian and NIE did not individually deduct either of these fees from the NIE bank account. However, Garian did withdraw at least $111,948 from NIE's bank account, and potentially more in the form of unidentifiable cash withdrawals.
19. Garian deposited investor money into a single bank account over which only Garian (in his own name and under his alias, Balian) had signatory control. All investor funds were commingled into this one account. This bank account containing the pooled investor funds was the source of all investments made by Garian and NIE, and all payments made to investors. Securities that were purchased by NIE and Garian were done so on NIE's behalf, and not on behalf of any single investor.
20. Investors who wanted to withdraw money from their account made a request to NIE, usually directly to Garian or one of NIE's finders. NIE would then issue a check signed by "B. Balian" to the investor, and a corresponding amount was deducted from their monthly statement. At least one investor witnessed Garian using a stamp to sign the checks "B. Balian." Garian also received all of NIE's monthly bank statements and brokerage statements.
C. Garian Misrepresented NIE's Investments and Falsified Investor Account Statements
21. Each month beginning in 1997, NIE investors received account statements that Garian prepared. The account statements showed the type and amount of the securities an investor purportedly owned. The monthly account statements also indicated whether or not NIE had purportedly bought or sold any securities that month, and whether or not a management or net profit fee had been assessed. The statements for most of NIE's investors represented that their holdings, through NIE, included several tech and Internet stocks, such as eBay, Microsoft, and AOL, and the stocks of new public companies, such as VA Linux and Red Hat.
22. The NIE account statements were false. NIE either did not own the securities listed or had never purchased the securities in the quantities reflected on the account statements. For example, several account statements indicate that in December 1999, NIE purchased over 10,000 shares of VA Linux at its offering price of $30 per share. Soon after its public offering, VA Linux traded for over $200 per share. Thus, NIE account statements reflected substantial profits to investors, in one case nearly $600,000. However, NIE never purchased as many shares of VA Linux as it represented to its clients. NIE, through an account controlled by Garian, purchased just 1500 shares of VA Linux at post-IPO market prices. One block was purchased in December 1999 for $190 per share, while the other block was purchased in January 2000 for $160 per share; NIE also purchased 1000 total shares of VA Linux on margin between January and March 2000, at prices ranging from $70 to $140 per share.
23. Similarly, NIE did not own dozens of other securities it claimed to have purchased on behalf of its clients. The few securities Garian did purchase were in quantities far less than reflected on investor account statements, and often at higher prices than disclosed to NIE's investors.
24. NIE's false account statements concealed the investments Garian and NIE were actually making. Garian and NIE used pooled investor funds to trade in futures and commodities. Although the Investor Agreement stated that NIE might invest in futures and commodities, up until 2000, NIE and Garian never disclosed the scope and extent of their trading activities in these markets to their investors. In addition, the statements were false because Garian effectively had invested client funds in an unregistered investment company. Garian also did a substantial amount of day trading of stocks on margin in 1999 and 2000. The frequency of his trades and the fact that they were done on margin were not disclosed to NIE's investors.
25. The false NIE account statements helped Garian and NIE hide the Ponzi-like scheme. NIE raised more than $19 million from investors between 1997 and 2001, virtually all of which was deposited and commingled into the same NIE account. However, Garian transferred just $5.2 million of the investor funds into securities trading accounts during the same time period, and lost all but $1.6 million of these funds. From 1997 to mid-2000, NIE repaid investors about $14.1 million, $4.9 million less than was deposited by investors. The money withdrawn by NIE investors purportedly represented both principal and "returns" on their investments, but was actually money deposited by new investors. NIE did not begin withdrawing money from any of its brokerage or commodity accounts until mid-2000. An additional $2.3 million was withdrawn from NIE's bank account in the form of cashier's checks and remain unaccounted for. Garian himself withdrew at least $111,948 from NIE's bank account for his own personal benefit, even though he did not have his own investment account with NIE. Nearly $50,000 of the money he withdrew from NIE was used to purchase a BMW automobile.
D. NIE's $750,000 Loan to Aegis
26. In February 2000, NIE made a $750,000 loan to Aegis. This loan was funded entirely with investor monies. The loan was originally set to be repaid after one year, but has subsequently been amended twice. Aegis has repaid NIE $300,000 from the original loan.
27. At Garian's direction, Aegis paid $240,000 of the monies originally owed to NIE to an NIE investor. In turn, the investor lent these funds back to Aegis. This money is due the investor in September 2004. Aegis has been making quarterly interest payments to the investor since August 2001.
28. Aegis is due to repay NIE the remaining $210,000 in February 2003.
E. NIE and Garian's Lulling Behavior
29. For most of the scheme, investors were able to withdraw money freely from their NIE account. However, beginning late in 2000, NIE investors began having difficulties withdrawing funds from their account. Garian convinced several investors who attempted to withdraw money to leave their money with NIE and, in some cases, to deposit more money into their accounts to invest in upcoming IPOs that Garian said NIE would soon be participating in.
30. Investors that were allowed to withdraw money were often given checks by Garian that bounced. Between February and May 2001, NIE, through Garian, issued over $240,000 in bounced checks.
31. Several other investors who attempted to withdraw funds were told by either Garian or his attorney that their funds were not currently available, and that their money was tied up in a "note" that was not yet due. These investors were assured by Garian that their money was secure in the "note," and that it would be returned to them in early 2002. Garian's attorney told investors who wanted to see this "note" that they would need to sign a confidentiality agreement, but did not allow those investors who signed the confidentiality agreement to see the purported note. Rather, Garian's attorney showed them a blank promissory note stating that NIE promised to pay the investor an unspecified amount ofmoney with interest to coincide with the liquidation of "an illiquid investment of NIE." This "illiquid investment" was actually the monies owed by Aegis described in ¶¶ 26-28. The amount owed on the Aegis loan was far less than the $4.9 million currently owed to NIE investors.
FIRST CLAIM FOR RELIEF
UNREGISTERED OFFER AND SALE OF SECURITIES
Violations of Sections 5(a) and 5(c) of the Securities Act
(Against NIE and Garian)
32. The Commission realleges and incorporates by reference ¶¶ 1 through 31 above.
1. NIE and Garian, and each of them, by engaging in the conduct described above, directly or indirectly, made use of means or instruments of transportation or communication in interstate commerce or of the mails, to offer to sell or to sell securities, or to carry or cause such securities to be carried through the mails or in interstate commerce for the purpose of sale or for delivery after sale.
2. No registration statement has been filed with the Commission or has been in effect with respect to these securities.
3. By engaging in the conduct described above, defendants NIE and Garian 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
Violations of Section 17(a) of the Securities Act
4. The Commission realleges and incorporates by reference ¶¶ 1 through 31 above.
5. NIE and Garian, and each of them, by engaging in the conduct described 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 use of the mails:
a. with scienter, employed devices, schemes, or artifices to defraud;
b. obtained money or property by means of untrue statements of a material fact or by omitting to state a material fact 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 purchaser.
6. By engaging in the conduct described above, defendants NIE and Garian 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
Violations of Section 10(b) of the Exchange Act
7. The Commission realleges and incorporates by reference ¶¶ 1 through 31 above.
8. NIE and Garian, and each of them, with scienter, by engaging in the conduct described above, directly or indirectly, in connection with the purchase orsale of a security, by the use of means or instrumentalities of interstate commerce, or of the mails:
a. employed devices, schemes, or artifices to defraud;
b. made untrue statements of a material fact or omitted to state a material fact necessary in order to make the statements made, in
the light of the circumstances under 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.
9. By engaging in the conduct described above, defendants NIE and Garian 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 thereunder, 17 C.F.R. § 240.10b-5.
FOURTH CLAIM FOR RELIEF
FRAUD BY AN INVESTMENT ADVISER
Violations of Sections 206(1) and 206(2) of the Advisers Act
10. The Commission realleges and incorporates by reference ¶¶ 1 through 31 above.
11. NIE and Garian, and each of them, by engaging in the conduct described above, directly or indirectly, by use of the mails or means or instrumentalities of interstate commerce:
a. with scienter, employed devices, schemes, or artifices to defraud clients or prospective clients; and
b. engaged in transactions, practices, or courses of business which operated as a fraud or deceit upon clients or prospective clients.
12. By engaging in the conduct described above, defendants NIE and Garian violated, and unless restrained and enjoined will continue to violate, Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C. §§ 80b-6(1) & 80b-6(2).
FIFTH CLAIM FOR RELIEF
FAILURE TO REGISTER AS AN INVESTMENT COMPANY
Violations of Section 7(a) of the Investment Company Act
13. The Commission realleges and incorporates by reference ¶¶ 1 through 31 above.
14. NIE, by engaging in the conduct described above, directly or indirectly, offered for sale or delivery after sale, by use of the mails or means or instrumentalities of interstate commerce, securities or an interest in a security without first being registered as an investment company in accordance with Section 7(a) of the Investment Company Act.
15. By engaging in the conduct described above, defendant NIE violated, and unless restrained and enjoined will continue to violate, Section 7(a) of the Investment Company Act, 15 U.S.C. § 80a-7(a).
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
Issue findings of fact and conclusions of law that the defendants committed the alleged violations.
Issue a judgment, in a form consistent with Fed. R. Civ. P. 65(d), permanently enjoining Garian and his officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Advisers Act.
Issue a judgment, in a form consistent with Fed. R. Civ. P. 65(d), permanently enjoining NIE and its officers, agents, servants, employees and attorneys, and those persons in active concert or participation with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Sections 5(a), 5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Sections 206(1) and (2) of the Advisers Act and Section 7(a) of the Investment Company Act.
Issue in a form consistent with Fed. R. Civ. P. 65 an injunction directing relief defendant Aegis to account for all funds received from NIE and to pay such funds into the registry of the Court, pending further order of the Court.
Order defendants NIE and Garian to disgorge all ill-gotten gains from their illegal conduct, together with prejudgment interest thereon pursuant to 28 U.S.C. § 1961.
Order defendant Garian to pay civil 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) of the Advisers Act, 15 U.S.C. § 80b-9(e).
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
DATED: February 10, 2003