CEO of Smart Online Arrested for Securities Fraud

The chief executive of Smart Online, Dennis Michael Nouri, his brother Reeza Eric Nouri, and four brokers have been arrested on charges of securities fraud.^[1]

The men are accused of paying bribes to brokers who would then ask customers to buy the company’s stock, thus driving up the price artificially.^[2] The arrested brokers are Ruben Serrano, Anthony Martin, James Doolan, and Alain Lustig.^[3]

Smart Online shares debuted at $1.50 on the Over-the-Counter Bulletin Board in 2005,^[4] as a response to investors demands that there be a way to cash out of their shares.^[5] The government asserts that the Nouris wanted to boost that price and get shares of the company to debut on the Nasdaq Stock Market.^[6]

The U.S. Securities and Exchange Commission suspended trading of the stock in January 2006 after citing a lack of reliable financial information and the possible manipulation of the company's stock price.^[7] After the SEC suspended trading in the stock federal investigators taped conversations in which Michael Nouri talked to a witness about how to lie to investigators and how to be careful when paying kickbacks to brokers.^[8]

The Nouris also are accused of lying about and omitting material business facts in Smart Online's securities reports; all six defendants have been charged with one count of conspiracy and one count of securities fraud.^[9]

To prove a federal criminal securities fraud case, the government must prove beyond a reasonable doubt that: 1)the defendant used a device or scheme to defraud someone, made an untrue statement of a material fact, or failed to disclose a material fact which resulted in making the defendant's statements misleading; 2) the defendant's acts were, or failure to disclose was, in connection with the purchase or sale of securities; the defendant used the mail or telephone in connection with these acts or this failure to disclose; and the defendant acted for the purpose of defrauding buyers or sellers of securities.^[10] If the government successfully convicts the defendant on securities fraud charges, the defendant can be fined up to $1,000,000 (up to $5,000,000 if a corporation), imprisoned for up to 10 years, or both.^[11].

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^[1] Chris Coletta, Smart Online CEO arrested on charges of securities fraud, Triangle Business, September 11, 2007, available at available at LEXIS, News Library, Wire News Services File.
^[2] Id.
^[3] Id.
^[4] Shares of Smart Online lost 79 percent of their value in trading Tuesday, changing hands at 60 cents in mid-afternoon trading. Id.
^[5] Id.
^[6] Id.
^[7] Id.
^[8] Id.
^[9] Id.
^[10] 15 U.S.C. §77a & 78a (2007).
^[11] Id.