Papashon CEO Faces Fraud Suit
The Securities and Exchange Commission filed suit Thursday against the head of the Woodland Hills-based Papashon restaurant chain, alleging that he and his company defrauded 1,300 investors out of $21.6 million in a scheme to raise money for restaurants that were never built.
According to officials with the SEC, Jonathan C. Papa, chairman and chief executive of Papa Holdings Inc. has agreed to a judgment that includes a permanent injunction barring any future securities violations like the company’s former “boiler room” operation in Woodland Hills.
At times, the operation employed up to 30 people making cold calls to investors nationwide, according to the civil complaint and officials with the SEC.
Under the judgment, Papa and Papa Holdings will be required to pay back all “ill gotten gains.” Papa also will be liable for civil penalties up to $110,000 per violation, according to Kelly Bowers, assistant regional director for the SEC’s Los Angeles enforcement office.
“What remains for us to figure out is what disgorgement [repayment] and civil penalties will be,” said Bowers. “If we can reach a settlement with him, we’ll do it. If we don’t, we’d go to court.”
Papa, 27, could not be reached for comment. SEC officials would not comment on his whereabouts.
Nervous investors, worried after the chain abruptly closed restaurants in Pasadena, Beverly Hills and Encino recently, complain that they have been unable to reach Papa or any of the other principles in the firm.
Ruth Papa, Jonathan’s mother, said her son remains in Los Angeles and did not leave the country, as some investors have speculated.
“We don’t have anything to hide,” she said, adding that she saw her son two weeks ago. “Maybe some bad management in business, but that is it.”
She declined further comment Thursday. Her attorney, Tom Stepp of Newport Beach, did not return phone calls.
Neither Ruth nor Jonathan’s father, Ramon Papa, was named in the securities fraud complaint. Ramon Papa was listed in records filed with the California secretary of state as president of the subsidiary that ran the restaurant chain.
The SEC’s civil complaint, which resulted from an investigation that began in November, was filed against Jonathan Papa, Papa Holdings and four subsidiaries: Ponzu V Inc., Ponzu VI Inc., Express 1 Inc., and Papa Exp 2 Inc.
Between November 1995 and September 1997, investors poured $13.5 million into the subsidiaries, believing that the funds would be used to build restaurants in New York, Las Vegas, San Francisco and other unspecified locations, according to the complaint and documents provided by investors.
Instead, the money was spent to help pay off mounting debts at the existing restaurants, pegged at $22.4 million as of September 1998, and to pay Jonathan Papa “undisclosed” commissions of up to 40%, the complaint said.
Papa Holdings Inc. and the subsidiaries “paid 30% to 48% in commissions, . . . far in excess of commercially reasonable commissions,” according to the complaint. “Papa himself received a 40% commission on his personal sales and typically received an 8% commission on sales made by others.”
Among those selling shares in the company was Chris Rawlings, the Woodland Hills man who federal authorities said was running a telemarketing scam before he was killed in February, apparently during a botched follow-home robbery. Police also are examining any possible connections between Rawlings’ business dealings and his death.
In addition to the $13.5 million raised for the Papashon subsidiaries, at least $8.1 million was raised for Papa Holdings, to be used for a planned reorganization, a public offering and to provide working capital for the company, the complaint said.
But no registration for a public offering was ever filed with the commission, and the SEC alleges that investors were misled about the size of employee commissions.
In addition to fraud, the SEC alleges that the company sold securities despite the fact that neither the securities nor the broker/dealers were registered with the commission.
Bowers said the civil action does not cover investors who put money into the first four restaurants--in Pasadena, Beverly Hills, Encino and Long Beach--saying there is no evidence of fraud in those cases. Only the Long Beach Papashon remains open.
Among those who invested early on were people such as Walter Rothermel of St. Louis, who put $35,000 in Papa Holdings and its subsidiaries from 1994 to 1998.
Though the requirement that Jonathan Papa will be required to pay back the money gave Rothermel a glimmer of hope, he and most other investors said they consider the money gone.
“This isn’t going to put me in the poorhouse; I have plenty of other assets,” said Rothermel, who borrowed much of the money he invested in Papashon. “What really hurts is the pride. You hate to have your ego squashed on something like this. Especially in the hip pocket.”
Bowers of the SEC also noted that the action has no direct effect on the Long Beach restaurant.
“We’re strong,” said Pauley Nepomuceno, manager of the Long Beach eatery, which opened last September. “We’re doing good.”
Employees from the Papashon restaurant in Encino, which was abruptly closed last month, have been picketing outside of the Long Beach Papashon, demanding nearly $20,000 in back pay. Six have filed complaints with the state’s Labor Board, according to the former manager of the Encino outlet.
