Micahel Nouri, a co-founder and the chief executive officer of Smart Online, was arrested along with his brother Reeza Eric Nouri on federal charges of securities fraud and conspiracy.

Four stock brokers also were arrested in the alleged scheme which centered around a plan to drive up Smart Online’s stock price, according to the U.S. Attorney’s Office in Manhattan.

Nouri resigned “effectively immediately” as CEO at Smart Online, the company said in a statement. He also stepped down as a member of the board.

David Colburn, a former executive with Electronic Data Systems and a member of the Smart Online board, was named interim CEO late Tuesday, said Jeff LeRose, the company’s chairman. Colburn joined the board in May.

“When we got the news I was totally shocked,” LeRose said in an interview.

“The real key is that the [SEC] is not seeking any kind of monetary fine against the company,” added LeRose, who owns Research Triangle Software in Cary. “That’s a really good sign. If they thought the company was involved, they would go after us, too.”

LeRose was out of town at a conference when he was notified about Nouri’s arrest. The company asked for and received Norui’s resignation, LeRose said.

Nouri’s brother, who was an office manager at Smart Online, also has left the company.

Another brother, Henry Nouri, is an executive vice president with the firm and is responsible for research and development. He is one of Smart Online’s co-founders.

Smart Online provides businesses with a variety of services as a software-as-a-service provider. Its stock trades over the counter under the symbol SOLN.

The stock price plunged to 68 cents from $2.20.

“Smart Online was informed today that Mr. Nouri has been charged with federal securities fraud and conspiracy to commit securities fraud,” the company said.

The Securities and Exchange Commission launched an investigation into Smart Online stock trading in January of 2006. The company had made a variety of changes, including the naming of LeRose, founder of Research Triangle Software, as its chairman as it prepared to move its stock to the NASDAQ exchange. The SEC probe was announced just before the NASDAQ listing was to take effect.

“Smart Online intends to continue to take actions it believes are in the best interest of Smart Online’s stockholders, customers and employees,” the company added.

“Smart Online is not named in the criminal complaint and it has not been informed that any criminal action against it is anticipated,” the company said. “Smart Online has been informed that the SEC has named it in a civil action requesting injunctive relief from any future securities law violations. No fines or monetary relief is being sought against Smart Online. Smart Online has offered its further cooperation to federal officials and intends to pursue swift resolution of the civil matter.”

The Associated press reported that the four brokers – Ruben Serrano, Anthony Martin, James Doolan and Alain Lustig – face conspiracy and securities fraud charges.

According to the prosecutor’s office, the scheme took place between May 2005 and July 2007.

Nouri co-founded Smart Online in 1993. Earlier in his career he founded and served as CEO of Nouri Group of Companies, which acquired and privatized a number of government-owned firms in Europe.