Securities Law Blog

On March 7, 2013, the SEC announced fraud charges against attorney Brian Reiss for issuing legal opinion letters without any basis. Transfer agents need a legal opinion letter to lift the restriction on the stock and allowing it to be freely traded. According to the SEC, Brian Reiss set up 144letters.com to promote his legal opinion letter business and advertise volume discount rates. Reiss used a computer-generated template to draft his opinion letters without ever doing a basic inquiry to determine whether the stock should be traded freely. Reiss made false and misleading statements regarding whether the restriction should be lifted, to induce transfer agents to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public. The SEC charged Reiss with violating Sections 5(a), 5(c) and 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5.

The SEC has made its first payout, one year after the start of its whistleblower program. In 2010 the Dodd-Frank Act authorized the whistleblower program to reward individuals who offer “high-quality original information” that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered. The law specified that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to identify the whistleblower’s identity.

The award recipient will receive the maximum percentage payout equaling nearly $50,000 for helping the SEC stop a multi-million dollar fraud. Awards can range from 10 to 30 percent of the money collected in an SEC enforcement action against the perpetrators of the scheme.

According to the SEC, the whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which roughly $150,000 has been collected. The unidentified recipient provided documents and other information that reportedly accelerated the SEC’s investigation which prevented harming additional victims.

Last year the SEC brought insider trading charges against former professional baseball player Doug DeCinces and three others. DeCinces reportedly received confidential information about Abbott Laboratories Inc.’s plan to purchase Advanced Medical Optics Inc. and immediately began to purchase shares of Advanced Medial Optics in several brokerage accounts. DeCinces and the three associates he tipped, who also traded on the confidential information, all agreed to pay more than $3.3 million to settle the SEC charges.

Now, a year later, the SEC is charging the former Chairman and CEO of Advanced Medical Optics, James V. Mazzo, as the source of those illegal tips. The SEC is also charging DeCinces’ former Baltimore Orioles teammate (and Baseball Hall of Famer) Eddie Murray and friend David L. Parker, for trading on the inside information they received from DeCinces.

According to the SEC’s complaint, Mazzo was directly involved in the impending acquisition of Advanced Medical Optics and had a duty not to disclose the confidential information about the deal. Mazzo reportedly tipped DeCinces, who in turn tipped at least five others who traded on the inside information. Parker and Murray allegedly bought 25,000 and 17,000 shares respectively on the basis of the confidential information received from DeCinces and sold their stock following the public announcement.

Without admitted or denying the SEC’s allegations, Murray agreed to settle the charges against him and pending final approval by the court has agreed to pay a total of $358,151 for disgorgement, prejudgment interest and penalties.

College Football Hall of Fame inductee Jim Donnan has been charged by the SEC for allegedly running an $80 million Ponzi scheme with his business partner Gregory Crabtree. The pair reportedly conducted the fraud though a West Virginia-based company called GLC Limited.

According to the SEC complaint filed in federal court in Atlanta, Donnan and Crabtree offered and sold short term investments promising investors rates of return ranging from 50 to 380 percent. The former coach turned commentator, and his business partner, reportedly told investors that GLC was in the wholesale liquidation business and earned profits by buying leftover merchandise from major retailers and reselling them to discount retailers. The SEC alleges that only about $12 million of the $80 million raised from nearly 100 investors was actually used to purchase leftover merchandise.

The scheme ran from August 2012 through October 2010, during which time Donnan allegedly recruited the majority of investors by approaching contacts he made as a sports commentator and as a coach, according to the SEC complaint. At the time of the scheme’s collapse, Donnan reportedly had taken more than $7 million away from GLC, and Crabtree misappropriated approximately $1.08 million in investor funds.

College Football Hall of Fame inductee Jim Donnan has been charged by the SEC for allegedly running an $80 million Ponzi scheme with his business partner Gregory Crabtree. The pair reportedly conducted the fraud though a West Virginia-based company called GLC Limited.

According to the SEC complaint filed in federal court in Atlanta, Donnan and Crabtree offered and sold short term investments promising investors rates of return ranging from 50 to 380 percent. The former coach turned commentator, and his business partner, reportedly told investors that GLC was in the wholesale liquidation business and earned profits by buying leftover merchandise from major retailers and reselling them to discount retailers. The SEC alleges that only about $12 million of the $80 million raised from nearly 100 investors was actually used to purchase leftover merchandise.

The scheme ran from August 2012 through October 2010, during which time Donnan allegedly recruited the majority of investors by approaching contacts he made as a sports commentator and as a coach, according to the SEC complaint. At the time of the scheme’s collapse, Donnan reportedly had taken more than $7 million away from GLC, and Crabtree misappropriated approximately $1.08 million in investor funds.

Technology research analyst John Kinnucan plead guilty recently to conspiracy to commit securities fraud and two counts of securities fraud in Federal District Court in Manhattan. The owner of Broadband Research LLC told the judge in federal court that he worked from 2008 to 2010 to obtain private information from employees of public companies so that he could relay the information to others, who would then make profitable trades ahead of the public announcement of developments.

Kinnucan was first questioned by FBI agents at his Oregon home in October 2010. He was arrested on February 16, 2012 and transported to a New York jail. The sentencing guidelines with the plea deal call for Kinnucan to serve roughly four to five years in prison.

Included in the calculation of the sentencing guidelines is extra time for obstruction of justice related to threats Kinnucan made to prosecutors and FBI agents during the investigation of himself and his company. According to government reports, Kinnucan made nearly 25 threatening telephone calls from December through February that contained repeated profanity, religious slurs and violent acts. Sentencing is scheduled for January 2013.