12 Charged in Restaurant Securities Fraud Inquiry

Three current or former executives with Encino-based Topz restaurants were among 12 people charged Wednesday with securities fraud in connection with the sale of shares in the now-defunct Papashon restaurant chain.

The U.S. Securities and Exchange Commission filed fraud charges against the 12 former Papashon sales agents and managers, alleging that they concealed the amount of commissions they were making from investors when they sold shares in Woodland Hills-based Papa Holdings Inc. between 1995 and last year.

In a civil action filed in U.S. District Court, the SEC alleges that the 12--most of them current or former residents of the San Fernando Valley area--sold $23 million in securities in the once-popular chain without revealing that they would be collecting commissions of up to 40%. Instead, investors were given documents stating commissions would be about 10%, authorities allege.

One former director also failed to reveal that some of the funds would be used to bail out failing restaurants in the chain, the SEC charges.

The SEC is seeking to recover $2.5 million from the 12 defendants.

Among those charged were Stephen R. Keenum, 44, of Frazier Park, chief executive of the fast-growing Topz Restaurant Group; Mark Avila, 35, of Woodland Hills, president; and Victor R. Grauaug, 48, formerly of Westlake Village, a former vice president.

Also charged was Stephen Rawlings, 59, formerly of Chatsworth and the father of Chris Rawlings, the Woodland Hills man who federal authorities said was running a telemarketing scam before he was killed in February 1999, apparently during a botched follow-home robbery. Police have made one arrest in that case and said Wednesday they are still seeking a second suspect.

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Kelly Bowers, an attorney with the Los Angeles SEC office, said the sales agents and managers, based in Woodland Hills, were part of a scheme to defraud investors across the country by not revealing the true nature of the investments.

“The salespeople are an instrumental part of the fraud,” said Bowers. “They’re the ones that are reaching out to the investors, gaining their trust.”

Avila, who allegedly received more than $514,000 in commissions and “overrides” (essentially bonuses paid to managers for the sales of agents under them), acknowledged in an interview Wednesday that he was “well-paid” during the year and a half he worked for Papashon’s former owner, Jonathan Papa. But he insisted that he was unaware that the commissions he and others were receiving were far above the level revealed to investors.

“I swear on my children I didn’t know,” said Avila, who left the company in 1996. “Maybe it should have been looked into more.”

The complaint alleges that official documents sent to investors stated that the commissions would be “10% or more,” or a “percentage of the purchase price.”

But instead, workers raked in commissions and overrides of several times that amount--ranging from about $90,000 to $900,000--while selling shares in restaurants that never opened.

The sales agents, and especially managers, should have known what information investors were being given about the commissions, Bowers said.

“It wasn’t 10%,” said Bowers. “To the extent that they took 25% [or more], that’s a material difference.”

Charges also were filed against:

* David J. Naughton, 40, formerly of Sherman Oaks, who served as a director of two Papashon subsidiaries, according to the complaint;

* Richard C. Reining, 41, of Thousand Oaks, who was listed on a business card as a senior vice president of Papa Holdings;

* Adam E. Peck, 26, formerly of Chatsworth;

* Raffi T. King, 33, formerly of Los Angeles;

* Charles F. Hagemann, 36, of Northridge;

* Ronald L. Gaiser, 48, formerly of Oxnard;

* Joseph L. Hill, 31, formerly of Beverly Hills;

* Michael R. Tompkins, 48, formerly of Westlake Village.

Neither the defendants nor their attorneys could be reached for comment.

Wednesday’s charges mark the second time the SEC has leveled formal allegations in connection with the running of the Papashon chain, which specialized in Asian and French cuisine. All four of the restaurants, including operations in Encino and Pasadena, closed last year.

In May 1999, the agency filed fraud charges against Jonathan Papa and later won a $3.1-million judgment against him.

Bowers said he still is uncertain of Papa’s whereabouts and added that the $3.1 million, which would be used to reimburse defrauded investors, has yet to be paid.

Meanwhile, Avila worried about the impact that the adverse publicity might have on the Topz chain, which opened its first restaurant in Sherman Oaks in 1998, and has since opened five more, with plans for new stores in Glendale and Orange County.

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Though Avila, Keenum and Grauaug worked together at Papa Holdings, Avila insisted that there is no connection between the two companies.

“They decided to be a money-raising company, and we decided to be a restaurant, that’s the difference,” said Avila, who added that he hopes to settle the case.

“Mr. Grauaug, Mr. Keenum and myself had no control over the direction or operation” of Papa Holdings, he said.

“It’s not my fault that they did the things they did or went out of business.”