A Stock Pump and Dump with False Press Releases

A Stock Pump and Dump with False Press Releases

Last month the SEC initiated an enforcement action against Heart Tronics, a public company,  and six individuals including Willie Gault, a former professional football player in connection with a series of fraudulent schemes pumping the Company’s stock.  In a parallel criminal investigation the US Department of Justice and the US Postal Inspection Service announced they had arrested one of the individuals.  While I will admit the involvement of a former professional football player with a well known name caught by attention,  what I really found interesting was the criminal nature of the activities which lead to an actual arrest.  As I read the court filings I found that the public company was being accused of a lot of nasty things.  For instance the complaint alleges the following:

  1. False and Misleading Press Releases
  2. A Shrill Figuredhead co-CEO.
  3. Blind Trutsts and Nominee Entities
  4. Failure to Disclose Public Sales
  5. Fraudulent Corporate Documents
  6. False SEC filing
  7. Improperly Registered S-8 Stock

The SEC is basically alleging that the defendants basically cooked the books of the company, issued false press releases, hired an investor relations person to promote the stock, and sold stock into the market as it ran higher.  Basically a Pump and Dump.

The SEC saw fit to charge these individuals with violation of Sections or Rules 10(b), 10b-5, 12(a), 13(b)2A, 13(b)2B,  12b-20, 13a-1, 13a-11, 13a13, 13(b) 5, 13b2-1 of the Exchange Act of 1934, as well as violating Sections 5(a), 5(c), 12b-11,  13a-14,  and 17(a) of the Securities Act of 1933.  Additionally the SEC leveled Aiding and Abetting claims for violating those sections of the Securities Act and the Exchange Act against the various parties.  Not satisfied with the above mentioned violations, the SEC also claimed violation of Section 302(b) of Regulation S-T.  The SEC basically threw the book at these guys. 

In looking at the actual complaint filed in Federal Court, there are some interesting items which worth taking a closer look.

Item 4 of the factual allegations describes false statements in filings with the SEC, violations of the Sarbanes-Oxley certifications, and the Company’s books and records.  In reading the basis for the violations of the Sarbanes-Oxley certifications, it males one wonder why the SEC is not bringing claims of this nature more often.

In the Third Claim for Relief, the SEC charges four individuals with having “knowingly provided substantial assistance to the primary violations”.

In the Fourth Claim for Relief, the SEC charges one individual with “Controlling Person Liability…”  The SEC states that this individual (a) directly or indirectly controlled Heart Tronics; (b) possessed the power and ability to control Heart Tronics as to itis violation of various SEC regulations; (c) was in a meaningful sense a culpable participant in Heart Tronics violation of various SEC regulations.

In the Thirteenth Claim for Relief, the SEC charges the investor relations (IR) person with violation of section 17(b) of the Securities Act.  This is a pretty basic and easy one to understand.  The IR person failed to disclose to the public the nature and amount of consideration that he received to tout the stock of Heart Tronics.  In any manner in which someone promotes a stock they are supposed to disclose their compensation.  The SEC has taken the opinion in the past that this even includes when a person is paid to post on message boards and other forms of internet communication.  This is a really easy regulation to enforce, and it makes on wonder why the SEC has not taken a more aggressive position on Section 17(b) and used it to end more securities frauds before the public suffers greater harm.

In the fourteenth through sixteenth claims for relief, the SEC makes claims of “unjust enrichment” against the various partnerships, blind trusts, and individuals involved.

The SEC is seeking a disgorgement of all monies received, plus interest, and a permanent bar of the individuals from serving as officers or directors of public companies or any future securities offerings.

At the end of the day, the most striking about the Heart Tronics litigation was the involvement of a former professional football player, or that the Department of Justice got involved; it was how well written the SEC’s complaint was, and how well it clearly defined certain activities.  But we are left with the lingering question of why we do not see more enforcement actions of this nature.


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About Coral Capital Partners

Founded in 1995, Coral Capital Partners, Inc. is a consulting firm that provides services to investment banks, private equity, public and privately held companies.  Our experienced team brings a diverse set of skills that allow us to service a wide variety of needs.  Our clients have ranged from international public companies with operations on three (3) continents to smaller privately held domestic companies. The services provided has covered the spectrum of providing support services to other firms to leading and overseeing large multi-year projects.

The SEC Litigation Release can be found at:  http://www.sec.gov/litigation/litreleases/2011/lr22204.htm

A copy of the SEC’s complaint can be found at:  http://www.sec.gov/litigation/complaints/2011/comp22204.pdf

We do applaud the SEC ‘s efforts to police this type of activities.