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Carleasa A. Coates, Lead Trial Counsel
UNITED STATES DISTRICT COURT FOR THE
Plaintiff Securities and Exchange Commission (the "Commission" or "SEC") alleges as follows: NATURE OF THE ACTION 1. This case concerns the offer and sale of over $10 million of bogus limited liability partnership ("LLP") interests over the Internet by four Florida-based individuals. 2. From approximately June 1998 to October 1999, defendants Larry Grabarnick ("Grabarnick") and Marc David Shiner ("Shiner") promoted investments in unregistered LLP units to the public through bulk e-mails and Internet websites. Interested investors responded over the Internet by providing contact information, which Grabarnick and Shiner then sold as "leads" to defendants Donald LaBarre ("LaBarre") and Sarah Jane Peck ("Peck"). LaBarre and Peck used boiler room sales tactics to offer and sell the LLP units. Investors were told they would benefit from the deregulation of the electric service provider market in California. Grabarnick, Shiner, LaBarre and Peck made numerous material misrepresentations and omissions to investors regarding, among other things, the profitability of the investment, its likelihood of success, the risk and safety of the investment, and the need to invest quickly. For example, one investor was told that the only risk was that Los Angeles could fall into the Pacific Ocean. Others were led to believe that President and Hillary Clinton had made money in similar investments. 3. More than 580 people nationwide invested over $10 million by purchasing units, or fractions thereof, in eight LLPs. Each LLP consisted of 80 partnership units, each valued at $19,675, for a total of $1,547,000 per fully funded partnership. Many investors were elderly; many rolled over money from IRA and 401(k) accounts. After all 80 units were sold, or as many as could be, investors were told that the partnerships would not be viable and offered them Over-the-Counter ("OTC") penny stock in exchange for their escrowed funds. Four partnerships acquiesced; trades were executed at approximately $4.00/share, and investors were required to hold their shares for at least two years. None of the partnerships ever became operational electric companies. Investors now hold worthless partnership units and delisted penny stock. 4. Grabarnick and Shiner together were paid $586,340 for selling leads. In addition, Grabarnick and Shiner each received approximately $275,000 in "kickbacks" in connection with the sale of the electric power LLP interests. LaBarre and Peck each received approximately $1.24 million in commissions from the sale of the LLP interests. 5. By engaging in such conduct, Grabarnick, Shiner, LaBarre and Peck violated, and unless enjoined will continue to violate, Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)] and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78(o)(a)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder. JURISDICTION 6. This Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. 7. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce and/or of the mails in connection with the transactions described in this Complaint. DEFENDANTS 8. Larry Grabarnick ("Grabarnick"), age 54, is a resident of Avventura, Florida. In 1998 Grabarnick formed a company with Marc Shiner called Internet Media to generate investor leads over the Internet. 9. Marc David Shiner ("Shiner"), age 58, is a resident of Boca Raton, Florida. In 1986, the Commission barred Shiner from association with a broker or dealer, investment company, investment adviser or municipal securities dealer for five years for his failure to disclose a 1984 conviction in Massachusetts for insurance fraud, larceny and attempted larceny (In the Matter of Marc D. Shiner, Barry L. King, Wellesley Financial Management Services, Inc., Admin. Proc. File. 3-6759, Rel. No. 34-23862 (Dec. 3, 1986)). Shiner has not reapplied to become associated with a broker or dealer. In 1998, while promoting the electric power partnerships involved in this matter, Shiner was convicted of federal tax evasion, and served four months in prison and four months of house arrest. 10. Donald LaBarre ("LaBarre"), age 60, is a resident of Boca Raton, Florida. During the relevant period, LaBarre was the President of Electric Choice Investments, a sales office marketing two electric power partnerships. 11. Sara Jane ("Sally") Peck, age 58, is a resident of Avventura, Florida. During the relevant period, Peck was the President of Twenty First Century Power, a sales office marketing two electric power partnerships. OTHER RELEVANT PERSONS AND ENTITIES 12. Joe Steingold ("Steingold"), who died in 1999, was a resident of San Diego, California. Steingold masterminded numerous intricate racketeering schemes to peddle worthless LLP interests and then took for his personal use money purportedly intended to develop and operate the partnership's business. In each scam, investors were left holding worthless partnership interests. In 1986, Steingold was convicted of mail fraud and sentenced to four years in federal prison for defrauding hundreds of Detroit area mortgage owners and investors of $2.4 million in what Michigan's attorney general called the "biggest mortgage scam" in the state's history. 13. Full Power Corporation ("Full Power"), based in Lakewood, Ohio, was incorporated in Ohio on February 3, 1998 at Steingold's direction to serve as a vehicle for the electric power partnership scheme. Through a reverse-merger with Worldwide Dental Distribution (OTC - WDDD), a Florida corporation, Full Power Corp. became a publicly traded company on September 30, 1998, changing its name to Full Power Group, Inc. and trading on the OTC Bulletin Board under the symbol FPGR. Full Power acquired a license from the California Public Utilities Commission to sell electricity throughout California, which it sublicensed to various LLPs on the basis of geographic area. 14. Defendants have been selling Steingold's bogus LLP interests for the better part of a decade, including, but not limited to, similar fraudulent offerings involving wireless cable television and specialized mobile radio. Wireless cable television and specialized mobile radio were widely-considered hot investment opportunities at the time. The electric power LLP offering was based upon another hot investment opportunity: selling electricity in the newly deregulated California power market. Overview of the Fraud and Security Offered 15. Investors were led to believe that they would become partners in a power company servicing a metropolitan area in California. The securities offered were units in eight Limited Liability Partnerships: (1) Capitol Electric & Light, LLP; (2) Community Electric & Power, LLP; (3) L.A. Power & Light LLP; (4) Reliable Electric & Power, LLP; (5) San Diego Power & Light, LLP; (6) San Jose Power & Electric, LLP; (7) Southern California Power Partners, LLP; and (8) Twin Power & Electric of San Francisco / Oakland, LLP. Each LLP was comprised of 80 partnership units, each valued at $19,675, for a total capitalization of $1,547,000. Investors could purchase a half unit for $10,168, or a quarter unit for $5,425. Many investors purchased more than one unit, many using IRA monies and 401(k) retirement savings to finance the purchase. 16. Investors did not have meaningful managerial control over the LLP's and were in substance passive investors. Most investors lacked the technical expertise or business savvy required to manage any sort of company. Most did not even live in California, where the business was supposed to be located. They were powerless to contribute to the success or failure of the LLP's and expected profits to be derived from the entrepreneurial or managerial efforts of others. Furthermore, as described more fully below, defendants gutted each LLP, leaving investors with insufficient funding to create or run a successful business. 17. Grabarnick was Steingold's "master distributor," responsible for recruiting sales offices, explaining the product and distributing brochures. 18. Each LLP was marketed by a different sales office, called a "Partnership Recruiter," which also served as the "Initial Managing Partner" of the partnership. Investors were told that only 50 units were available to the public and that Full Power and the Initial Managing Partner would each retain 15 non-voting units in each partnership. In actuality, the Partnership Recruiter attempted to sell as many units as possible, and all of the units had voting rights. The Partnership Recruiter received approximately 40% of the sale: $7,750 for the sale of a full unit; $3,875 for a half unit; or $1,938 for a quarter unit. 19. Full Power Corporation received equal percentages for each sale purportedly in exchange for licenses necessary to sell power in California. The actual cost of the license never remotely approached the $620,000 that each fully funded partnership paid Full Power. Under California law, anyone could register as a statewide Electric Service Provider with the California Public Utilities Commission by paying a $100 filing fee and depositing $25,000 toward a company economic viability bond. Moreover, Full Power sublicensed the same statewide license to all eight partnerships under the guise of each sublicense applying to a different geographic location. The end result was that, unbeknownst to investors, Full Power received millions of dollars in fees for the same $100 license. 20. An additional amount of $675 applied to the sale of each unit or fraction thereof for escrow fees and "compliance" expenses. The compliance expenses consisted of a person from Steingold's office calling each investor and walking them through a script in which the "compliance officer" told the investor, among other things, that the LLP interests were not securities. The remaining 18%, or $3,500 of a $19,675 unit, was put in escrow purportedly for future operating costs of the partnership. If a partnership was fully funded, this left $280,000, out of more that $1.5 million invested, to run the business. 21. None of the partnerships ever became operational electric companies. After as many LLP units as possible were sold to the general public, investors were told that the partnership would not be viable and were offered stock in Full Power Corporation's OTC penny stock for their escrowed funds. Trades were executed at approximately $4.00/share, and investors were required to hold their shares for at least two years. Investors are now stuck with worthless partnership units and delisted penny stock. Grabarnick and Shiner Marketed the Scam
22. Grabarnick and Shiner formed a joint venture called Internet Media to locate, obtain, evaluate and market leads for the sale of the electric power LLPs interests. They outsourced all computer programming, web design, web hosting, and bulk mailing to various individuals and small companies, but provided all content themselves. Shiner, facing jail time for tax evasion, sold his boiler room operation to LaBarre and focused with Grabarnick on generating leads over the Internet, a relatively passive but potentially lucrative business. Grabarnick's and Shiner's False
23. In the spring of 1998, Grabarnick and Shiner began designing websites promoting investments in electricity. Their websites included a short video. Because video-streaming was novel in 1998, this impressed many visitors. Grabarnick and Shiner worked closely with a computer programmer over several weeks to design the sites, supplying him with all of the text, the video and graphics. 24. Grabarnick and Shiner's websites contained numerous material misstatements and omissions regarding, among other things, the profitability of the investment, its risk and safety, need to invest quickly, and the partnership's likelihood of success. 25. Typical and illustrative of the misrepresentations are these excerpts, all from the same website (emphasis original):
26. Grabarnick and Shiner knew, or were reckless in not knowing, that their websites contained numerous material misstatements and omissions regarding, among other things, the profitability of the investment, its risk and safety, need to invest quickly, and the electric power LLP's likelihood of success. Given their prior dealings with Steingold, Grabarnick and Shiner knew, or were reckless in not knowing, that the electric power LLP's were a complete fraud. 27. Grabarnick and Shiner also knew, or were reckless in not knowing, that their websites failed to disclose that over 80% of investor funds applied toward "commissions" and other purported costs, including so-called "licensing fees" and that they sold the potential investor's contact information as leads. Grabarnick's and Shiner's False and
28. Grabarnick and Shiner hired bulk e-mailers to generate up interest in the electric power LLPs and direct potential investors to their website. They targeted America On Line accounts because at the time AOL account holders typically had the highest income demographics and AOL subscriber lists were exploding in 1998 and 1999. For people new to the Internet, e-mail was a novelty, and as a result 1998 and 1999 are widely considered the heyday for promotional bulk e-mailing. 29. Grabarnick and Shiner initially authorized the mailing of approximately 4 million bulk or "spam" e-mails per week, but this number increased as more mailers were hired. Grabarnick and Shiner paid rates ranging from $500 for 1 million e-mails to $2000 for 5 million. Grabarnick and Shiner's e-mail messages generated 200 to 300 leads for every 1 million sent. Grabarnick and Shiner sold leads for rates ranging from $15 to $30 apiece, for a total of $586,340. 30. Every 100 leads resulted in anywhere from two to five sales. In addition to the money they were paid for generating leads, Grabarnick and Shiner each received approximately $275,000 in kickbacks for every unit, or fraction thereof, sold by a boiler room under Grabarnick's distributorship. Together Grabarnick and Shiner received over $1 million of the $10 million taken from investors in the electric power LLP scam. 31. The bulk or "spam" e-mails composed by Grabarnick and Shiner contained egregious misstatements and omissions, especially regarding the profitability of the electric power LLPs, intended to grab the reader. For example, one e-mail with the subject line "Passive Tax Free Income" had this message: Retire in 30-50% less time New regulations open $200 million growth market to general public! Returns of 40% and more. More details and short video presentation Click here ---- 32. Grabarnick and Shiner made changes to the spam e-mails frequently, tweaking them to see if the revised message or subject line would invite more website visits and thus generate more leads. The basic material misstatements and omissions, however, remained the same. Potential investors were always promised incredible returns ("a potential 40% or greater yield as well as a lifetime income"), involving no selling or multilevel marketing, in a huge industry ("Be a partner in a 20 billion plus dollar per year industry") in which stable blue chip Wall Street firms were investing ("Know what opportunities in which Merrill Lynch, Goldman Sachs and other financial giants are currently investing"). 33. Grabarnick and Shiner knew, or were reckless in not knowing, that their bulk or "spam" e-mails contained numerous material misstatements and omissions regarding, among other things, the profitability of the investment, its risk and safety, need to invest quickly, and the electric power LLP's likelihood of success. Given their prior dealings with Steingold, Grabarnick and Shiner knew, or were reckless in not knowing, that the electric power LLP's were a complete fraud. 34. Grabarnick and Shiner also knew, or were reckless in not knowing, that their bulk or "spam" e-mails failed to disclose that over 80% of investor funds applied toward "commissions" and other purported costs, including so-called "licensing fees" and that they sold the potential investor's contact information as leads. LaBarre and Peck Used Boiler Room Sales Tactics
35. Once an interested investor responded over the Internet by providing contact information to Grabarnick and Shiner, unbeknownst to him and her that information was sold to a boiler room. The next step was that the investor received a call from a salesperson who, under defendants' direction, used high-pressure sales tactics to close the deal. 36. Grabarnick supervised several of the boiler rooms, including those owned and operated by LaBarre and Peck. LaBarre's sales office was called "Electric Choice" and sold units in L.A. Power & Light and San Diego Power & Light, and possibly other LLPs. Peck's sales office was called "21st Century Power" and sold units in Twin Power & Electric and Reliable Electric & Power. Grabarnick had an office in each of these boiler rooms. 37. LaBarre and Peck employed telemarketers who used boiler-room sales tactics to offer and sell units in at least four electric power LLPs. The telemarketers worked from scripts provided by LaBarre and Peck. 38. Shiner gave sales presentations to the telemarketers to help them pitch the units - explaining the program, how deregulation supposedly worked, and how investors purportedly could make money. 39. At Grabarnick's, Shiner's, LaBarre's and Peck's direction, telemarketers made numerous material misstatements and omissions regarding, among other things, the profitability of the investment, its risk and safety, need to invest quickly, and the electric power LLP's likelihood of success. A school bus driver who invested in Twin Power was told, "It was going to be big. Can't lose. Compare AT&T and MCI." One 58 year-old retiree, who invested $10,000, was told by LaBarre's telemarketers "that people like the Clintons had made similar investments and doubled or tripled their money." 40. LaBarre and Peck and their telemarketers grossly misled investors regarding the risk of an investment, if they discussed risk at all. One of LaBarre's telemarketers told one investor, "This investment wouldn't make money only if Los Angeles fell into the ocean." Although the written offering materials contained disclosures that investing in an electric LLP was a highly speculative venture, the telemarketers contradicted those disclosures by telling the prospective investors that the LLP was "virtually guaranteed" to generate enormous profits. A 46-year-old steamfitter who invested $20,000 in April 1999 was told that he "would be able to retire in two to three years." Another investor said, "They told me everything was up and running. We would get great profits. They provided graphs and told us other LLPs were up and running." According to another investor, "Sally Peck indicated that Reliable would be selling power by 8/99 [and] we would start to realize a profit immediately [and] that Reliable had an exclusive license." 41. After LaBarre and Peck and their telemarketers hyped the investment, sometimes getting the investor to commit over the phone, LaBarre and Peck would send the prospective investor offering materials by overnight delivery if the prospective investor expressed interest in the offering and, more importantly, had funds immediately available. The offering materials were prepared by Steingold and distributed by Grabarnick, and included, among other things, a videotape, subscription documents, payment instructions and a "confidential partner questionnaire." In the videotape, Full Power represented that it was already operational and claimed that investors had the potential to make sudden, dramatic wealth as the company continued to grow. 42. Within a day or two after sending the offering materials, the telemarketers telephoned the prospective investors to make sure they had received the offering materials, to answer any questions and to solicit a final commitment. LaBarre and Peck participated in telephone calls with reluctant investors and often persuaded them to invest. LaBarre and Peck and the telemarketers used hard-sell tactics designed to create a sense of urgency - routinely telling prospects falsely that there were only one or two units left, and that they needed to decide quickly or they would miss out on the opportunity to invest. 43. Grabarnick, Shiner, LaBarre and Peck knew, or were reckless in not knowing, that the representations made to potential investors over the phone and in the written offering materials contained numerous material misstatements and omissions regarding, among other things, the profitability of the investment, its risk and safety, need to invest quickly, and the electric power LLP's likelihood of success. Given their prior dealings with Steingold, Grabarnick, Shiner, LaBarre and Peck knew, or were reckless in not knowing, that the electric power LLP's were a complete fraud. 44. LaBarre and Peck, through their sales offices, each made approximately $1.24 million in commissions from the sale of the LLP interests. FIRST CLAIM (Violations of Section 17(a)
45. Plaintiff SEC hereby incorporates ¶¶ 1 through 44 with the same force and effect as if set out here. 46. In the manner described in ¶¶ 1 through 44, defendants Grabarnick, Shiner, LaBarre and Peck, in the offer or sale of securities, by the use of means or instruments of interstate commerce or by the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material facts or omissions of material facts 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 transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities, in violation of Section 17(a) of the Exchange Act [15 U.S.C. § 77q(a)]. SECOND CLAIM (for Violations of Section 10(b) and
47. Plaintiff SEC hereby incorporates ¶¶ 1 through 44 with the same force and effect as if set out here. 48. In the manner described in ¶¶ 1 through 44, defendants Grabarnick, Shiner, LaBarre and Peck, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions of material facts 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 transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons, in violation of 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. THIRD CLAIM (for Violations of the Broker-Dealer Registration
49. Plaintiff SEC hereby incorporates ¶¶ 1 through 44 with the same force and effect as if set out here. 50. In the manner described in ¶¶ 1 through 44, defendants Grabarnick, Shiner, LaBarre and Peck violated 15(a) of the Exchange Act [15 U.S.C. § 78(o)(a)] by making use of the means and instrumentalities of interstate commerce and of the mails to effect, induce, and attempt to induce the purchase and sale of securities without being registered with the SEC as a broker or dealer in accordance with Section 15(b) of the Exchange Act [15 U.S.C. § 78(o)(b)] and when no exemption form registration was available. FOURTH CLAIM (for Violations of the Registration Provisions) 51. Plaintiff SEC hereby incorporates ¶¶ 1 through 44 with the same force and effect as if set out here. 52. In the manner described in ¶¶ 1 through 44, defendants Grabarnick, Shiner, LaBarre and Peck, directly or indirectly (a) without a registration statement in effect as to the securities, (i) made use of the means or instruments of transportation or communication or the mails to sell such securities through the use or medium of a prospectus or otherwise, or (ii) carried or caused to be carried through the mails, or in interstate commerce, by any means or instruments of transportation, such securities for the purpose of sale or for delivery after sale, and (b) made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to sell through the use or medium of a prospectus or otherwise securities for which a registration statement had not been filed as to such securities, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)]. PRAYER FOR RELIEF WHEREFORE, the SEC respectfully requests that this Court enter a judgment: (i) permanently enjoining defendants Grabarnick, Shiner, LaBarre and Peck, and their agents, servants, employees, attorneys, and those in active concert or participation with them, who receive actual notice by personal service or otherwise, from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)] and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78(o)(a)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] promulgated thereunder. (ii) ordering defendants Grabarnick, Shiner, LaBarre and Peck to provide an accounting and disgorge all ill-gotten gains from the conduct alleged herein, with prejudgment interest; (iii) ordering defendants Grabarnick, Shiner, LaBarre and Peck 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)]; and (iv) granting such other relief as this Court may deem just and appropriate. Dated: March 18, 2002 ________________________________
http://www.sec.gov/litigation/complaints/complr17430.htm
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