broker fraud

Independent/broker-dealer Basis Financial LLC, and its owner and CEO Armen Karapetyan have been charged with defrauding customers of about $1.8 million over a three year span through four private placement offerings involving financially shaky issuers.

According to the FINRA Complaint

According to a complaint filed by the Financial Industry Regulatory Authority’s (FINRA) Department of Enforcement on Feb. 16, the fraudulent conduct included both material misrepresentations and omissions. Gabriel Goldfine, a stockbroker with Basis, was also charged.

Basis, Karapetyan and Goldfine, the respondents, received a significant amount of compensation in the form of salary, commissions, mark-ups or loans as a result of fraudulent transactions. They failed to disclose the compensation to customers, the complaint says.

They also failed to disclose that these private placement issuers were in terrible financial condition, that they had heavy debt loads that were paid from proceeds raised in the offerings, or that some proceeds were used to make unsecured loans to other entities owned and controlled by Karapetyan, the complaints says.

To lure investors, the respondents told them that initial public offerings (IPOs) were imminent in three of the private placements and that the share price was expected to rise significantly. These statements had no basis in facts, the complaint says.

Regarding one of the private placements offerings, the respondents fraudulently exaggerated the share price, collecting extra cash from the offering that eventually went into the pockets of Karapetyan and Goldfine.

The fraudulent private placement schemes gathered about $1.8 million in funds from 43 customers, the complaint says, while generating about $228,000 in commissions and fees for the respondents.

As a result, the respondents willfully violated Section 10(b) of the Exchange Act as well as Rule 10b-5 that is based on the Act, plus a host of FINRA rules and rules of the National Association of Securities dealers (NASD), a FINRA predecessor.

The violated rules include those concerning the sale of unregistered shares, as well as failures of due diligence, the failure to the capture and preserve business communications, that failure to establish and maintain reasonable supervisory systems and procedures and the failure to report customer complaints, among others.

In the complaint, FINRA’s Department of Enforcement requests that respondents be ordered to fully disgorge their ill-gotten gains and make complete restitution to the defrauded customers, including interest, as well as pay the costs of the disciplinary proceeding.

Respondent Basis, located in Florida, has been a member of FINRA since 1997. The firm employs seven brokers. Respondent Karapetyan, the CEO and owner of Basis, entered the financial industry in 1995. Until July 2003, he worked as a registered broker for seven different FINRA members. He joined Basis in August 2003, where he is the majority owner as well as a registered representative and registered principal.

Respondent Goldfine, a broker since 1990, joined Basis in May 2006 and worked there until July 2008. As of December 2011, Goldfine worked for Buckman, Buckman & Reid in New York, according to FINRA public disclosure records.

The complaint states that Basis, Karapetyan and Goldfine violated the antifraud rules of federal securities laws by knowingly or recklessly making material misrepresentations, omitting material information and engaging in fraudulent misconduct in the course of their the sale of private placement offerings to investors using the U.S. mail or other instrumentalities of interstate commerce.

Accoona

One such private placement involved a company called Accoona. Founded in early 2004, Accoona claimed to be developing an internet search engine. After it tried and failed to sell shares in the U.K., Accoona pursued a public offering in the United States.

Karapetyan and Goldfine learned in early 2007 that 2 million shares of Accoona stock were available for $5.00 per share with a 100,000 share minimum. To pool investor funds so as to meet the minimum share requirement, they formed an entity named the Forus Partner Fund, but did not provide any offering documents to investors, the complaint says.

They lured 12 people to invest $605,000 in Forus to purchase shares of Accoona during March and April 2007. While Basis was soliciting investors in Forus, Karapetyan and Goldfine told various of its customers that Accoona’s IPO would happen within two to six months. They also made wild predictions about the price, claiming it would appreciate to between $10 and $25 per share. Karapetyan and Goldfine had no reasonable basis for these claims, the complaint says.

Accoona’s IPO did not succeed, and in December 2007, it went out of business. The investors lost all their money, but Karapetyan and Goldfine managed to profit by misrepresenting the price of the Accoona shares, the complaint says. Karapetyan told investors the fund bought 110,000 shares for $5.50 per share, when they actually cost $5.00. Karapetyan and Goldfine split $25,000 of the extra $55,000.

The respondents also failed to disclose the proper information regarding commissions. Basis received a $50,000 payment for purchase of the shares, and Goldfine received $25,000 out of that $50,000, the complaint says. This was never disclosed to investors.

Pharmco LLC

Next the respondents induced fraudulent investments in Pharmco LLC, which operated as a single retail pharmacy store located in North Miami Beach, Fla.

Pharmco’s founder assigned ownership of the company Karapetyan and some of his associates in exchange for a $223,000 promissory note, plus interest, to be paid no later than April 3, 2009, the complaint says.

Basis then began to solicit investments in Pharmco. From January 2010 through October 2010, a total of 16 customers invested about $500,000.

Per an agreement signed earlier, the complaint says, Basis was to receive a $5,000 payment each month for “investor awareness and business advisory services,” as well as commissions of 10 percent on the money raised. Basis received $15,000 in advisory fees and $60,000 in commissions through the Pharmco offering, but these fees were never disclosed to investors.

Moreover, by the time shares in Pharmco were being sold to investors, the promissory note used to purchase the company was already in arrears, the complaint says.

When the creditor threatened legal action, Pharmco paid $100,000 to settle the claim, paid for with funds from the Pharmco investors, the complaint says. None of these materials facts were disclosed to investors.

The $223,000 promissory note and the $100,000 settlement dwarfed Pharmco’s assets and net income at the time of the offering, the complaint says. Pharmco’s assets totaled $23,059 and its net income was $8,117, according to 2009 financial statements.

To top off the fraud, Basis provided investment documents to its customers that claimed Pharmco was raising the $500,000 to expand its business and eventually go public, the complaint says, although it consisted of only a single store. In addition, a breakdown of the planned uses of the invested funds was total fiction.

SFH1 Acquisition Corp.

In November 2006, Karapetyan incorporated SFH1 Acquisition Corp. and then conducted two offerings for the company. The first, beginning in August 2007, raised $300,000 from 11 investors. The second, beginning in February 2008, raised $306,500 from two investors. At the time, there was no public market for SFHI stock, the complaint says.

The private placement memoranda for SFHI said the proceeds would be used for general working capital, including payment of professional fees associated with due diligence, audits and legal fees, the complaint says. It also said SFHI would pay up to 10 percent in commissions for the securities sold.

A little while after the first offering closed, however, SFH1 loaned $50,000 to Pharmco. A few months later, SFH1 loaned Pharmco another $25,000. Both loans were unsecured.

The respondents failed to disclose to SFH1 investors that their funds would be used for loans to Pharmco, and in early 2008, Karapetyan wrote himself two checks for $10,000 each from the SFH1 bank account. Basis and Karapetyan never disclosed to investors — as they were obligated to do — that Karapetyan would receive such compensation. They also failed to disclose SFH1’s outstanding debt at the time of the offerings.

To induce investors to sink money into SFH1, to Basis and Goldfine made material misrepresentations. For example, in September 2007, Goldfine told one investor that SFH1 was due to go public within three to six months. Goldfine later said that the shares would be worth $1.00 each after the IPO, which meant an investment of $30,000 would be worth $500,000.

Based on Goldfine’s assertions, the customer invested $30,000, the complaint says. In reality, there has never been a public market for SFH1 stock and Goldfine had no reasonable basis for stating there would be.

MMAX

Another transaction described in the complaint involved the sale of a convertible promissory note offered by a Florida company called MMAX that supposedly produced mixed martial arts fight events in Latin America. The note was sold to a single customer for $120,000 in November 2007.

Goldfine recommended this MMAX investment. Over the phone Goldfine told the customer that the company was profitable, and that it owned all rights to mixed martial arts fights in Latin America. He said several fights were already booked, the complaint says. He also told the customer, with no factual basis whatsoever, that MMAX would go public in a year to 18 months after his investment, and that the customer would be able to convert the promissory note into shares that would trade at four- to twelve-times the price he had paid. Goldfine also falsely claimed that MMAX had registered with the Securities and Exchange Commission (SEC).

To date, MMAX has not filed anything with the SEC. Nor is the company any closer to going public, the complaint says.

Aurus Corp.

Finally, the complaint also states that Karapetyan participated in the sale of unregistered shares, among other violations, in transactions involving Aurus Corp.

Karapetyan acted as the broker for customer accounts opened by Normand Terroux at Basis in October 2006 for three entities formed in the British Virgin Islands. A total of 19 million Aurus shares were placed in these accounts.

At the time, Aurus had no registration statement and was not exempt. Nor did Aurus ever submit anything to the SEC or publish any information on how the Terroux entities came by its shares, the complaint said.

Eventually, the three Terroux accounts sold all the Aurus shares they held for about $2.2 million, and Basis received total commissions of about $94,000, the complaint says.

Almost all the proceeds from the sale of the Aurus stock were wired out of the Terroux accounts to overseas banks in Monaco and Gibralter shortly after the sales, the complaint says. Despite obvious red flags, Basis and Karapetyan made no effort to determine anything about the Terroux entities, including when the shares were obtained, how the shares were obtained, and whether the shares were paid for. In so doing, they failed to comply with the requirements of Section 5 of the Securities Act of 1933.

Guiliano Law Group

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