Dennis Michael Nouri, who was president and CEO of Smart Online, and his brother Reeza Eric Nouri are accused of bribing four New York brokers to push the company's stock on investors and drive up its price, the U.S. Attorney for the Southern District of New York said Tuesday.

The brothers were each charged with one count of securities fraud, which carries a maximum 20-year prison term and fines of up to $5 million, and one count of conspiracy to commit securities fraud.

Michael Nouri was arrested at his home in Raleigh and Reeza Nouri at his home in Chapel Hill on Tuesday. A detention hearing was scheduled for 2:30 p.m. Thursday in Durham. Federal prosecutors say they have recordings of Michael Nouri discussing the scheme, including how to hide bribes.

The Nouris' temporary attorney, David Long, said Tuesday he didn't know whether the brothers have retained permanent legal counsel.

Smart Online officials Tuesday tried to distance the company from Michael Nouri, saying he has resigned as CEO. The company named a temporary replacement.

News of the arrests comes after several warning signs last year. In January 2006, the Securities and Exchange Commission suspended trading in Smart Online's stock on suspicion of stock manipulation. The move derailed the company's plans to list its stock on the Nasdaq Capital Market.

The company conducted an internal investigation but did not conclude that officers or directors had engaged in criminal or fraudulent activity, Smart Online wrote in a filing with the SEC. Smart Online installed a new chairman in a bid to improve transparency and strengthen its corporate governance.

The costs of the investigations hurt the company's profit and stock price, which had climbed above $11 in 2005 but fell to $2 in March 2006.

On Tuesday, Smart Online's shares, which trade on the over-the-counter market, lost three-quarters of their value, falling $2.12 to 68 cents.

The alleged scheme revolved around trying to boost Smart Online's stock price before a planned public listing on the Nasdaq, U.S. Attorney Michael J. Garcia said in a prepared statement. The conspiracy took place from May 2005 to July 2007, according to the complaint filed in federal court in Manhattan. At the time, Michael Nouri owned thousands of shares, the complaint alleges.

Garcia's office said it has recorded conversations in which Michael Nouri told conspirators, including an unnamed witness, to lie to investigators to cover up the alleged scheme and broker kickbacks.

The complaint alleges that Michael Nouri instructed conspirators to tell investigators they "had not done anything wrong" and "did not pump and dump the stock." Michael Nouri also warned them against being photographed and demonstrated how to transfer money to another person without being seen, the complaint said.

The New York brokers -- Ruben Serrano, Anthony Martin, James Doolan and Alain Lustig -- were arrested Tuesday on securities fraud and conspiracy charges.

Michael Nouri arranged to pay the brokers and the unnamed witness at least $136,000 in bribes to sell more Smart Online shares to investors and drive up the stock price, according to the complaint. The SEC also brought civil charges against the six.

"Pump-and-dump" schemes are nothing new on Wall Street, said New York securities lawyer Stuart Meissner, who has filed a separate lawsuit trying to recover investors' lost money. "People who pay brokers to pump stocks have been around," Meissner said. "But getting into that world and getting evidence is difficult."

Smart Online sells Web-based software to help businesses manage customer relationships. Michael Nouri founded the company in 1993. "We were all shocked today," said Jeff LeRose, who replaced Nouri as chairman of Smart Online in May. "We immediately asked for and received his resignation."

The company's board held an emergency meeting Tuesday and elected David Colburn interim CEO. Colburn, an independent board member, ran Electronic Data Systems' global manufacturing business from 2004 to 2006. He was not available for comment.

Smart Online is not named in the criminal complaint. The SEC has filed a civil action that serves as a warning and is not seeking fines.

"Smart Online does not believe its ongoing operations should be affected by the charges against Mr. [Michael] Nouri," the company said in a prepared statement. "Smart Online intends to continue to take actions it believes are in the best interest of Smart Online's stockholders, customers and employees."