The Securities and Exchange Commission today charged a purported heart monitoring device company and six individuals involved in a series of fraudulent schemes to artificially inflate the company’s stock. Among those charged are a former pro football player, a Hollywood talent agent, and an attorney who masterminded the scheme.
The SEC alleges that Heart Tronics installed former pro football player Willie Gault as a figurehead co-CEO along with former Hollywood executive J. Rowland Perkins in order to generate publicity for the company and foster investor confidence. Meanwhile behind the scenes, California-based attorney Mitchell J. Stein was controlling most of the company’s business activities, hiring promoters to tout Heart Tronics stock on the Internet, and reaping nearly $8 million from secret trades that he orchestrated unbeknownst to investors.
According to the SEC’s complaint filed in federal court in Los Angeles, Gault and Perkins rarely questioned Stein’s fraudulent agenda and abdicated their fiduciary responsibilities under the Sarbanes-Oxley Act. Stein and Gault together defrauded one investor into making a substantial investment in Heart Tronics based on false representations that his money would fund the company’s operations. Instead, Stein and Gault diverted the investor’s proceeds for personal use, including the purchase of Heart Tronics stock in Gault’s personal brokerage account “Catch 83” to create the false appearance of volume and investor demand for the stock.
“Stein took advantage of Gault’s celebrity to further prop up the image of Heart Tronics as a successful enterprise,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement. “Stein secretly sold millions of dollars in stock while peddling false claims of Heart Tronics’s lucrative sales orders, and has been living the high life off his illicit proceeds with multiple homes, exotic cars, and private jets.”
In addition to Heart Tronics, Stein, Gault and Perkins, the SEC charged three other individuals involved in the scheme, including Stein’s chauffer and handyman Martin B. Carter of Boca Raton, Fla., who carried out the fraud with him. The SEC also charged stock promoter Ryan A. Rauch of San Clemente, Calif., as well as Mark C. Nevdahl of Spokane, Wash., who was the trustee and stockbroker for a number of nominee accounts that Stein used to unlawfully sell Heart Tronics stock.
In a parallel criminal investigation, the U.S. Department of Justice today announced the arrest of Stein.
According to the SEC’s complaint, Heart Tronics was known as “Signalife” during most of the scheme’s time period from December 2005 to December 2008. Heart Tronics common stock was formerly listed on the American Stock Exchange but is now quoted on the OTC Link under the symbol HRTT.PK.
The SEC alleges that Heart Tronics fraudulently and repeatedly announced millions of dollars in sales orders for its product between 2006 and 2008 when, in fact, the company never had viable sales orders from actual customers. Stein and Carter fabricated numerous documents to support the false disclosures to the public, going so far as to have Carter make a one-day round-trip to Japan at Stein’s direction to mail back a letter from a fictitious customer in order to deceive management, disclosure counsel, and auditors. They also arranged to ship products to one of Carter’s friends to create the illusion that the company was delivering a heart monitoring device to a bona fide customer. Stein also profited by causing Heart Tronics to unlawfully pay Carter approximately $2 million in cash and Heart Tronics stock in a sham consulting agreement, and Carter paid nearly all of the proceeds back to Stein in the form of a kickback.
The SEC alleges that Stein hired Rauch to solicit numerous investment advisers, retail and institutional brokers, and other investors to buy Heart Tronics stock. Rauch failed to disclose that he was being paid by Heart Tronics in exchange for promoting company stock to investors. While Stein was orchestrating his campaign of misinformation and other schemes designed to inflate Heart Tronics’ stock price, his wife as the company’s majority shareholder directed the sale of more than $5.8 million worth of Heart Tronics stock while failing to disclose the sales as required under federal securities laws.
According to the SEC’s complaint, Stein enlisted Nevdahl to act as trustee for a number of purportedly blind trusts to create the façade that the shares were under the control of an independent trustee. The trusts were blind in name only, and Nevdahl met Stein and his wife’s regular demands for cash by continually selling Heart Tronics stock though the trusts.
The SEC’s complaint charges the defendants with various violations of the federal securities laws and seeks disgorgement of ill-gotten gains with prejudgment interest financial penalties and permanent injunctive relief. The SEC seeks permanent officer-and-director bars and penny stock bars against Stein, Gault, and Perkins as well as a permanent penny stock bar against Carter and Rauch. The SEC’s complaint also seeks the return of ill-gotten gains from nine relief defendants including Stein’s wife Tracey Hampton-Stein and her company ARC Finance Group LLC, which is the majority shareholder of Heart Tronics.
The SEC’s investigation was conducted by Adam Eisner and Rachel Nonaka under the supervision of Charles Cain. The SEC’s litigation will be headed by Mark Lanpher. The SEC acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the U.S. Postal Inspection Service.
The name Tracey Hampton-Stein is also a party to the mass joinder complaint Stein filed against Bank of America and is believed to be his wife.
According to the extensive SEC complaint filed, Stein held himself out as Heart Tronics’ outside counsel and claimed not to be a Company officer or director; however, in practice, Stein was a de facto officer who controlled many of Heart Tronics’ business decisions and public disclosures. In that capacity, Stein orchestrated the repeated announcement of fictitious sales orders for Heart Tronics’ products in public filings with the Commission, press releases, and other public broadcasts, all designed to make it appear that Heart Tronics was more successful than it actually was. Stein also installed former professional football player Willie Gault (“Gault”) as a figurehead co-CEO along with former Hollywood executive J. Rowland Perkins (“Perkins”) in order to generate publicity for the company and foster investor confidence. Through this and other fraudulent schemes described below, Stein was able to obtain for himself millions of dollars in ill-gotten gains at the expense of public investors.
In 2002, Stein’s wife, relief defendant Tracey Hampton-Stein (“Hampton-Stein”), became the largest shareholder of Heart Tronics, owning approximately 85% of the Company’s common stock. She owned this stock through a holding company, relief defendant ARC Finance Group, LLC (“ARC Finance”). From at least December 2005 through September 2008, while Stein was orchestrating a campaign of misinformation designed to inflate the price of Heart Tronics stock, Stein and Hampton-Stein (collectively, “the Steins”) directed the sale of more than $5.8 million worth of Heart Tronics stock without disclosing it to the public as required by law. To conceal their purchases, the Steins used accounts in the name of purportedly blind trusts and other nominee entities, identified above as relief defendants. The Steins used the proceeds of the sales to fund their lavish lifestyle, which included multiple homes, exotic cars, and private jets.
To accomplish this, Stein enlisted defendant Mark Nevdahl (“Nevdahl”), a registered representative of a broker-dealer registered with the Commission (stock broker) to act as the trustee on the blind trust accounts. This created the façade that the Steins’ Heart Tronics stock was held by separate legal entities under the control of an independent trustee, when, in fact, the trusts were “blind” in name only. Nevdahl met the Steins’ regular demands for cash by continually selling Heart Tronics stock through the trusts. The blind trusts were further designed as part of a scheme to avoid the required regular public disclosures under the federal securities laws of ARC Finance’s sales.
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Stein was also aided in his fraudulent schemes by, among others, defendant Martin Carter (“Carter”). For example, Stein and Carter fabricated documents designed to make it appear to Company officers that Heart Tronics had entered into viable sales orders for millions of dollars worth of Heart Tronics products when, in fact, it did not.
At the same time, Stein drafted false and misleading press releases and other public statements for the Company to announce sales orders, or directed other Company officers to draft public statements based on false and misleading information he provided.
In late 2008, Stein and Gault also defrauded an individual investor into making a substantial investment in Heart Tronics based on, among other things, materially false representations that the proceeds of the investment would be used for the Company’s operational expenses. Instead, Stein and Gault diverted the investor’s proceeds for their personal use, including the purchase of Heart Tronics stock on the open market to create the appearance of active trading volume and to inflate Heart Tronics’ stock price.
in the complaint filed by the SEC, Stein is described as: Mitchell Jay Stein (“Stein”) is a California attorney who has purportedly acted as outside counsel to Heart Tronics from approximately 2002 to the present. From at least December 2005 through December 2008, Stein effectively controlled Heart Tronics and its officers, but nominally was not an officer, director or shareholder of the Company. Stein is married to relief defendant Tracey Hampton-Stein. Stein is a United States citizen living in Hidden Hills, California.
Stein’s wife is described: Tracey Hampton-Stein (“Hampton-Stein”), the wife of Stein, is the sole managing member of ARC Finance Group LLC, Heart Tronics’ largest shareholder. Hampton-Stein is believed to be unemployed. Hampton-Stein is a United States citizen living in Hidden Hills, California. Hampton-Stein was unjustly enriched by receiving the proceeds of the unlawful sale of Heart Tronics stock.
You can read the full SEC complaint against Mitchell Stein here.
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