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By Dan Lonkevich    Updated 12:30 PM, Mar-14-2014 ET   

Amir Mireskandari and Khaled Alattar, the co-founders of online luxury-goods retailer LuxeYardInc., are fighting back against the group that they claim are responsible for a complicated pump-and-dump scheme that defrauded investors of some $30 million and pushed the company into involuntary bankruptcy.

Mireskandari, Alattar and Los Angeles-based LuxeYard are currently embroiled in a raft of lawsuits including one in a Texas state court in Houston and another in U.S. Bankruptcy Court in Los Angeles in connection with the scheme they say was organized and led by four men with about 20 co-conspirators.

The Texas lawsuit alleges that stock promoter Kevan Casey and financial advisor Frederick Huttner orchestrated a scheme that involved helping LuxeYard go public through a reverse merger and raise money through private placements in order to gain control of shares to be used in a pump and dump that was executed between April and August 2012.

The litigation has also named the Manalapan, N.J.-based law firm of Anslow & Jaclin LLC as a defendant. Last year, the firm settled for an undisclosed amount and went out of business.

Former partnerGregg Jaclin told The Deal that the firm settled to avoid legal fees and that the situation had nothing to do with Anslow & Jaclin's break-up.

Another defendant is Tobin Smith, a former commentator on Fox Business Network who was fired last year for violating the network's policy against accepting compensation to recommend stocks.

Others named in the lawsuits include the former shell company Top Gear Inc. and investors and stock promoters Jonathan Friedlander, Scott Gann, Jonathan Camarillo, Jeff Lamont, William Bartlett Jr., Thomas Hudson, Lawrence Isen, David Nagelberg, Lance Baral, Joseph Lee, Mark Trotter, Jeffrey Sater, Tommy Allen, David Bahr, Trevor Ling, Doug Shaw, Robert Klinek and his wife Susan Pack, Lisa Ann Komoroczy,Sean Crowley, Robert Gleckman, and a group of trusts and other investment vehicles they controlled.

Gann was a stockbroker atSouthwest Securities Inc. who in 2008 was permanently barred from the securities business by theSecurities and Exchange Commission for engaging in market timing trades on behalf of Haidar Capital Management LLC and Haidar Capital Advisors LLC. The bar was upheld by the U.S. Court of Appeals for the 5th Circuit in 2010.

In October, Bahr was sentenced to 18 months in prison and fined $65,000 for agreeing to pay a secret kickback of $750,000 to a stock broker as part of what federal prosecutors said was a pump-and-dump scheme involving the shares of iTrackr Systems Inc.

In 2006, Trotter agreed to pay $1.04 million to settle a lawsuit brought by the Texas attorney general's office for violating the state's law against spam e-mail.

The transfer agent Globex Transfer LLC and brokers Apex Clearing Corp., Westor Capital andWilson-Davis & Co.also were named as third-party defendants because they allegedly knew about the fraud and profited from it.

The defendants reject the allegations and argue that the lawsuits have been filed out of bitterness by Mireskandari and Alattar after LuxeYard lost its investors' money and couldn't raise new capital.

The case has its origins in Mireskandari's and Alattar's efforts to raise capital for the company they co-founded as LY Retail, which operated a flash sales website for luxury goods. Their plan was to capitalize on the popularity of websites such as Gilt Group Inc.'s Gilt.com.

In August 2011, Mireskandari first consulted with his Houston area financial adviser Huttner, who he had known and worked with since 2002.

Huttner introduced Mireskandari to Casey who was also from Houston. Huttner and Casey told Mireskandari they could help him build LY Retail's business by arranging for it to go public through a reverse merger with a public shell and then raising money through private placements.

Anslow & Jaclin helped Casey and Huttner find the shell Top Gear, which was controlled by about 50 Israeli shareholders who were willing to sell it for $460,171. Casey, Huttner and others named in the lawsuits received LuxeYard shares in the reverse merger.

Casey and Huttner are then alleged to have persuaded Globex to lift the restrictive legend on the shares with a false legal opinion letter from Anslow & Jaclin.

Mike Turner, a representative of Globex, denied LuxeYard's allegations against the transfer agent. He told The Deal that Globex based its decision to release restrictions on the shares on a registration statement rather than a legal opinion.

The co-conspirators allegedly sold some shares through matched orders, raising $1.5 million which was paid to stock promoter Next Media to begin the first round of the stock promotion.

Next Media and the co-conspirators engaged Smith, who was still a contributor to Fox at the time. Smith received LuxeYard stock which he later sold during the pump, the lawsuits claim.

Ison, another promoter, also received LuxeYard stock for promoting the company on his blog OTC Journal, according to the lawsuits.

The scheme also allegedly involved continued matched orders to maintain trading volume in LuxeYard stock.

Next Media was paid another $3 million, bringing the total spent on the campaign to $4.5 million, to continue the promotion, setting the stage for the dump, according to the lawsuit.

Meanwhile, LuxeYard raised about $5.8 million from private placements of convertible debt, convertible preferred stock and warrants in April and May 2012.

The debt financing in April 2012 raised $2.91 million. The debentures that LuxeYard sold paid a 10% coupon and were convertible into common stock at 30 cents a share. That was a 73.7% discount to the price where LuxeYard shares closed on April 23, 2012, the day before the private placement was completed.

The conversion price also was subject to full-ratchet anti-dilution protection. Those terms called for the conversion price to be lowered to equal the price of any future capital raise at a lower price.

In the private-investment-in-public-equity market, deals with such terms have been referred to as death spiral PIPEs. They can create a potential for dilution of shareholders that can make it difficult for a company to raise more capital in the future.

Just a month later, LuxeYard raised another $2.89 million in the private placement of units that consisted of convertible preferred stock and warrants. The preferred stock paid an 8% dividend and converted into common shares at 35 cents. The warrants converted at 35 cents and 50 cents.

Investors included Pergament Fund Management LLC, Huttner 1999 Partnership Ltd., Next View Partners LLC, Heights Capital Management Inc., Downsview Capital Inc., Kingsbrook Partners LP and Octagon Capital LLC.

Of those, only Huttner 1999 was named as a defendant in any of the lawsuits.

Anslow & Jaclin advised LuxeYard on the private placement of convertible preferred stock.

Mireskandari said in an interview that he won a $1.5 million settlement from Casey and Gann in September 2012 in connection with the first suit he filed in state court in Houston in August 2012.

Later in September 2012, Alattar brought a similar lawsuit also in the Houston court against other participants in the alleged scheme. Mireskandari and LuxeYard have joined that suit as well. The defendants in that case have made a motion to remove the case to federal court, which is pending.

In addition, Mireskandari alleges that the defendants helped push LuxeYard into involuntary bankruptcy proceedings in U.S. Bankruptcy Court in Los Angeles.

"They tried to finance and join an involuntary bankruptcy against LuxeYard," Mireskandari said in an e-mail. "They wanted to end litigation filed against them, and argued automatic stay and suggestion of bankruptcy to stop the litigation. They also paid for the legal fees and other considerations for third parties for commencing involuntary proceedings against LuxeYard."

Mireskandari said that those third parties, who were recruited by Philip Ison and Braden Richter, included some "non-legitimate" creditors. They filed two separate involuntary proceeding against LuxeYard. One was dismissed and the second is "about to be dismissed," Mireskandari said.

Richter is a former CEO of LuxeYard. The company has said he was fired for cause including collaborating with Casey and the pump-and-dump group and theft.

Ison owns warehouse space in Winston-Salem, N.C., that LuxeYard leased to store imported inventory. He is accused in the litigation of stealing inventory from the company.

LuxeYard also is involved in litigation with Richter and Ison in California Superior Court in Los Angeles to recover damages and property. Richter has denied the allegations and claims the charges against him were trumped up by the company, according to his attorney Robert Hirshman.

LuxeYard also is countersuing for damages in the bankruptcy proceeding. The company claims that Casey, Gann, Richter and Ison bribed the party that brought the involuntary bankruptcy petition. Ison's 801 Realty Investments LLCwas one of the creditors who brought the petition.

"They tried to derail the second Texas lawsuit by tossing LuxeYard into bankruptcy," saidBrian Keller, a partner with Faubus Keller LP in Houston, who represents Alattar. "We have very good evidence it was based on fraud. We have a witness who says he was bribed to bring the bankruptcy petition to derail the Texas case."

The witness, Christian Vega, had once worked at LuxeYard. He signed an affidavit last month, claiming that Casey, Gann, Richter and Ison used him and lied to him and other creditors of LuxeYard to bring the involuntary bankruptcy to halt the company's litigation against them.

According Mireskandari, the organizers of the pump and dump of LuxeYard have run the same scheme many times before.

"We are currently investigating and litigating against a group of sophisticated, well organized individuals that continuously apply the same illegal tactics across many microcap companies to defraud investors," he said in an e-mail.

"We have discovered that in 2012 alone, more than 30,000 investors were defrauded by this syndicate through a dozen 'pump and dump' operations. Originally numerous China related entities, and then other companies.

"This group is lot more sophisticated than the 'boiler room' guys everyone assumes for pump and dumps," he said. "Their modus operandi is direct mail, multi-page glossy investment booklets, email marketing, embedding articles, and very coordinated control of the float of a stock.

"They are represented by name brand legal firms, and have the liquidity and knowledge to hide behind nominee accounts. They also employ very sophisticated financial tactics to achieve their goals.

"The Pump & Dump Group consists of the organizers/ring leaders, their immediate associates, attorneys, marketing companies, and brokerage firms that all participate in this process across many stocks.

"Once their actions were revealed through our investigation and litigation, we uncovered a web of organized, criminal behavior with many predicate acts that continues to this date. They are currently undertaking other pump and dumps."

Mireskandari claimed that nine other companies including Quest Water Global Inc., All Energy Corp., Bering Exploration Inc., China Modern Agricultural Information Inc., China Global Media Inc., China Electronic Holdings Inc., Weikang Bio-Technology Group Co. and Plasma Tech Inc. may have been defrauded by Casey's pump and dump group.

"The total number of shareholders and dollar amounts duped within 18 months is staggering," he said.

In the meantime, Mireskandari said he and LuxeYard have complained to regulators and law enforcement.

"We have communicated with the SEC, FBI, U.S. Attorney, Texas Securities Board,Harris CountySheriff, and FINRA on this matter," he said in an e-mail.

Representatives of the SEC, FBI, U.S. Attorney's Office in Houston and the Financial Industry Regulatory Authority declined to comment.

David Clouston, a Dallas-based attorney representing Gann, Friedlander, Lee and other defendants, said in an e-mail that the original LuxeYard case, brought by Mireskandari, "was settled and funds (equivalent to cost of defense and in part, based on prior discussions, to help capitalize the company) were paid by a group of defendants to LuxeYard."

Clouston noted, however, that LuxeYard's former CEO Richter has claimed that the settlement funds were diverted from LuxeYard. Richter swore in a declaration in the bankrupcty proceeding that Mireskandari took control of the settlement money and refused to put it into LuxeYard's bank account.

Mireskandari denied Richter's allegation. He said the money was deposited into a LuxeYard account controlled by Richter and was down to about $300,000 when Richter was fired.

Clouston said that before investors provided capital to fund the idea that became LuxeYard, "there was no functioning company, no website, and no revenue. LuxeYard was merely a business plan, by Mireskandari and this Plaintiff, in need of funding."

Clouston said that after the capital was raised, LuxeYard's expenses "quickly exceeded all expectations."

At the same time, the flash-sales website industry declined.

The millions of dollars LuxeYard had raised "evaporated in a few months, as opposed to representing the expenses for the first 12 months as represented to these investors by the Company," Clouston said. "After additional capital raises (some of my clients participated in these as well) were also burned through despite projections, the Company once again hit up the investors for more money."

It was then that LuxeYard accepted "death-spiral" financing with a "third party," Clouston said. That was within nine months of the company's launch, he said.

"If you look at the trading history for Luxeyard, it is clear that this 'death-spiral' financing was a triggering event to the decline," Clouston said. "My clients have honored their obligations to LuxeYard, are disappointed in the Company's actions and those of Mireskandari and Plaintiff, and still remain to this day investors in LuxeYard based upon the restricted shares and warrants they hold."

In addition, Clouston noted that Mireskandari "is now apparently very interested in the 'litigation' business," citing the website for a company Mireskandari founded in January 2013.

The company, Houston-based Ran, Mires, Clark & Associates, describes itself as "a shareholder advocacy group with a focus on shareholders and companies that have been defrauded." The firm says it detects, analyzes and uncovers fraud and builds "a strategy to mitigate such fraud and recover losses for our clients."

Attorneys representing Casey and Huttner could not be reached for comment.

An attorney for Sater said he declined comment.

Attorneys for the other named defendants also could not be reached.

Globex's Turner said the lawsuit is "sour grapes because these guys were looking to raise money and couldn't so they decided to sue somebody."

He said that the massive scheme LuxeYard alleges, is not believable.

A representative of Apex declined comment. Wilson-Davis representatives could not be reached for comment.

Westor Capital has been in liquidation since April 2013.

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