U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16624 / July 12, 2000
Securities and Exchange Commission v. David J. Naughton, et al., Civil Action No. 00-07531 R(Ex) (C.D. Cal.)
On July 12, 2000, the Securities and Exchange Commission ("Commission") filed a complaint in federal court in Los Angeles charging twelve sales agents formerly employed by Papa Holdings, Inc. ("Papa Holdings") for securities fraud in connection with the sale of $23 million in securities. The complaint alleges that the Defendants failed to disclose to investors the amount of the commissions they were receiving for selling the stock.
Papa Holdings formerly operated restaurants in Pasadena, Beverly Hills, Encino and Long Beach, California under the name "Papashon." The company and its restaurant subsidiaries, based in Woodland Hills, California, raised nearly $23 million from 1,400 investors nationwide, purportedly to open four new restaurants and create a publicly traded company. Instead, these companies used investor funds to pay undisclosed sales commissions and to pay for losses at existing restaurants.
The complaint alleges that at various times from about November 1995 to January 1999, the Defendants sold preferred stock in Papa Holdings and its restaurant subsidiaries. Through offering documents, the Defendants represented that they would receive sales commissions equal to "10% or more" or "a percentage of the purchase price" of the stock. In fact, the actual sales commission paid ranged from 31% to 40%. The Defendants received a combined total of nearly $4 million in commissions from the sale of the stock. Naughton, a director of two restaurant subsidiaries, also knew, but failed to disclose to investors, that the proceeds from at least one restaurant subsidiary's stock offering would be used to cover losses at existing, related restaurants and to pay commissions rather than to open a new restaurant, as the investors were told.
The complaint names the following persons as Defendants: David J. Naughton, age 40 and a former resident of Sherman Oaks, California; Stephen R. Keenum, age 44 and a current resident of Frazier Park, California; Mark R. Avila, age 35 and a current resident of Woodland Hills, California; Stephen R. Rawlings, age 59 and a former resident of Chatsworth, California; Richard C. Reining, age 41 and a current resident of Thousand Oaks, California; Adam E. Peck, age 26 and a former resident of Chatsworth, California; Victor R. Grauaug, age 48 and a former resident of Westlake Village, California; Raffi T. King, age 33 and a former resident of Los Angeles, California; Charles F. Hagemann, age 36 and a current resident of Northridge, California; Ronald L. Gaiser, age 48 and a former resident of Oxnard, California; Joseph L. Hill, age 31 and a former resident of Beverly Hills, California; and Michael R. Tompkins, age 48 and a former resident of Westlake Village, California.
The Commission seeks to permanently enjoin the Defendants from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act and the broker-dealer registration provisions of Section 15(a) of the Exchange Act. The Commission also seeks disgorgement, prejudgment interest and civil penalties.
On June 1, 1999, the Commission obtained a permanent injunction enjoining Papa Holdings, its restaurant subsidiaries and their principal, Jonathan C. Papa ("Papa") from future violations of the federal securities laws. On March 8, 2000, the Commission obtained a final judgment ordering Papa to pay over $3.5 million in disgorgement, prejudgment interest and civil penalties.
See also Lit. Rel. Nos. 16141 and 16470.