Gatekeepers have long been a focus of SEC enforcement. In theory halting those who essentially hold the keys to the markets can help stop a variety of fraudulent schemes. It also leverages the scarce resources of Division of Enforcement which can aid deterrence. A Commission’s manipulation action involving four lawyers and a real estate agency is an example. SEC v. Sargent, Civil Action No. 1:19-cv-114616 (D. Conn.).
The action names as defendants attorneys Henry Sargen, Frederick Mintz, Alan Fraade and Joseph Tomasek, along with real estate agent Patrick Giordano. In 2014 Defendant Sargent recruited a number of friends and family to serve as nominal shareholders of BMP Holdings LLC. He subsequently filed a Form S-1 with the Commission for the firm. It falsely claimed the shareholders were not affiliates of the firm and acquired their shares for investment purposes.
Two years later Francis Reynolds, president of PixarBio Corp, retained Mr. Giordano to locate a shell company for PixarBio to acquire and use as a vehicle to distribute unregistered shares. He identified BMP. A few months later Defendant Sargent sold his controlling interest in BMP to PixarBio for $325,000. The two firms were then merged. The attorney opinion letters prepared by Messrs. Mintz and Fraade falsely stated that the shares were free trading.
Subsequently, over a period of several months, beginning at the end of October 2016, shares of the merged firm were sold to the public. Mr. Sargent had proceeds from the illegal distribution of about $631,000, Mr. Giordano of $117,000 and Mr. Herod $910,000. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a).
Attorneys Frederick Mintz and Alan Fraade each resolved claims as to them. Each lawyer consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Conduct based injunctions entered by the Court at the same time preclude each attorney from providing legal services regarding securities law exemptions to registration. The two attorneys also agreed to pay disgorgement and prejudgment interest, on a joint and several basis, totaling $28, 785.96. No penalty was imposed based on financial condition. An order was entered against each settling defendant in a separate Commission administrative proceeding, suspending the right of each attorney to appear and practice before the Commission. See Lit. Rel. No. 24900 (Sept. 16, 2020).