by T. GormanPosted on Posted in SECActions

Sometimes is does not pay to be the last man standing – particularly in a Commission enforcement action. Such was the fate of former NFL player and Olympic athlete Willie Gault. SEC v. Heart Tronics, Inc., Case No. 11-cv-01962 (C.D. Cal. Filed Dec. 20, 2011).

The case centered on an alleged fraudulent, manipulative scheme. Named as defendants were J. Rowland Perkins, Mark Nevdahl, Willie Gault, Mitchell Stein, Martin Carter and Ryan Rauch. The complaint alleged that Heart Tronics repeatedly announced millions of dollars in sales over a two year period beginning in 2006. Although the firm never had any real sales, defendants Stein and Carter crafted false documents to support their disclosures.

In 2008 Heart Tronics installed co-celebrity CEOs — Mr. Gault, a well-known athlete, and Mr. Perkins, a founder of a well-known talent agency. Mr. Stein continued to execute the scheme. He retained promoters who touted Heart Tronics stock on the internet. Mr. Nevdahl, a former registered representative, served as a trustee for a number of entities to create the façade that the shares were traded by an independent trustee. Tracey Stein, wife of Mitchell, was a major shareholder. She directed the sale of over $5.8 million worth of stock. The complaint alleged violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). A parallel criminal case was filed.

Messrs. Carter and Rauch were the first to settle. Mr. Carter, who previously pleaded guilty to one count of conspiracy, consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5). He also agreed to the entry of a penny stock bar. Disgorgement and penalties were waived based on Mr. Carter’s financial condition. Mr. Rauch settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(b). He also agreed to the entry of a three year penny stock bar and to pay disgorgement of $15,000 plus prejudgment interest and a civil penalty of $20,000.

Next Messr. Perkins and Nevdahl settled with the Commission. Mr. Perkins consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(B). He was also barred from serving as an officer or director for three years and directed to pay a civil penalty of $42,500. Mr. Nevdahl consented to the institution and settlement of administrative cease and desist proceedings in which an order was issued finding that he willfully violated Securities Act Section 17(a)(3). He was ordered to cease and desist from aiding or abetting or committing any future violations of Section 17(a)(3). The order also suspended him from participation in any penny stock offering for a period of six months. In the Matter of Mark Crosby Nevdahl, Adm. Proc. File No. 3-16056 (September 5, 2014). See Lit. Rel. No. 23081 (September 10, 2014).

Subsequently, the Court granted partial summary judgment against Mr. Stein and in favor of the SEC based on his criminal conviction on 14 counts of conspiracy to commit mail fraud and wire fraud, mail fraud, wire fraud, securities fraud, money laundering and conspiracy to obstruct justice. The court found violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). It entered a permanent injunction, officer and director and penny stock bar and ordered the payment of a civil penalty of $5,378,581.61, and disgorgement and prejudgment interest of $6,076,415.52.

Mr. Gault was the sole remaining defendant. He proceeded to trial. A jury found that he was involved in a fraudulent scheme and misappropriated investor funds that were lost as a result of his stock trading. He was also found to have knowingly circumvented, or failed, to implement internal accounting controls at the company and to have filed a Form 10-Q in 2008 that made false SOX certifications. The Court imposed a permanent injunction based on Securities Act Section 17(a)(3) and Exchange Act Section 13(b)(5). The Court’s order bars Mr. Gault from serving as an officer or director of any pubic company until he affirmatively demonstrates that he has become knowledgeable regarding the obligations of those who hold such positions under the securities laws and becomes competent to hold such a position. In addition, he was directed to pay $101,000 in disgorgement, prejudgment interest and $78,000 in penalties. See Lit. Rel. No. 23522 (April 15, 2016).

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by T. GormanPosted on Posted in SECActions

The lure of big profits from the settlement of large personal injury law suits was the hook used by a lawyer and his partner to attract investors to Prometheus Law. The thought of all those dollars — virtually riskless profits — drew investors. But in a world that is constantly changing one thing does not — “to-good to be true” is just that, “to good to be true.” The promoters made money; the investors lost. SEC v. PLCMGT LLC, Civil Action No. 2:16-cv-02594 (C.D. CA. Filed April 15, 2016).

Defendant PLCMGMT, dba Prometheus Law was founded by attorney James Catipay. The firm’s president and chief marketing officer was, for a portion of the relevant period here, defendant David Aldrich.

In 2013 Mr. Aldrich, using PLC VA as an investment vehicle, solicited investments for legal marketing to locate potential mass tort plaintiffs. While a few investors were located, but Mr. Aldrich could not locate an attorney to handle the cases because of the ethical restrictions on fee splitting with non-attorneys. Later that year Mr. Catipay, a tax attorney, agreed to join with Mr. Aldrich in his endeavor. Mr. Catipay revamped his firm’s website, soliciting investors. In November Attorney A entered into an arrangement with the Catipay Law Firm and Prometheus. A trilateral joint representation agreement was executed. The focus would be mass tort litigation.

Investors were solicited to purchase what were called “prepaid forward contracts.” The investments had a fixed principal amount and a set date when the initial investment and a guaranteed return would be paid back to the investor. The investments took various forums which offered returns that ranged from 100% to as much as 300% depending on the length of time.

Investors were told that the investment was safe with minimal risk. This was because Prometheus only marketed to, and qualified, plaintiffs in pre-settled or about to be settle cases were funds had been put into escrow. The settlement funds in these actions were substantial, investors were told. Investors were also promised that they could redeem their principal at any time and that their funds were secured under the Uniform Commercial Code. None of the claims were true.

Nevertheless, prior to the time Messrs. Catipay and Adrich got into a dispute in February 2015, about $8.54 million was raised in approximately 1,018 investments. Subsequently, Mr. Catipay took sole ownership of Prometheus and filed suit against Mr. Aldrich. The complaint alleged that his former business associated had converted over $3 million of Prometheus’ assets to personal use.

Mr. Catipay continued soliciting investors. Overall about $11.7 million was raised from investors. Of that amount only 35% was used on legal marketing expenses. Mr. Aldrich took about $3.7 million. Mr. Catipay took about $1.87 million by early 2016. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending.

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