(CN) – The 9th Circuit sided with the Securities Exchange Commission in an action against Heart Tronics Inc. and attorney Mitchell Stein, who fraudulently inflated the company’s stock price while working as its outside counsel.
The SEC’s case ran parallel to Department of Justice, which brought 14 criminal charges against Stein including securities fraud, wire fraud, money laundering and mail fraud, who was convicted on all counts. During trial, substantial evidence showed Stein created three fake purchase orders through two fraudulent companies, Cardiac Hospital Management and a fictitious entity called IT Healthcare.
“Stein went to great lengths to make the purchase orders appear legitimate,” the ruling states.
Two of the fraudulent sales to “IT Healthcare” were recorded for $3.3 million and $564,000, while the bogus Cardiac Hospital Management also made a purchase for $1.98 million, according to the opinion. Stein then touted the sales in press releases and included them in the company’s public filings in 2007 and 2008.
Stein was sentenced to 17 years in prison, ordered to forfeit $5 million and pay $13 million in restitution. On appeal, he challenged the judgment and sentencing, claiming that the DOJ failed to produce sufficient evidence to support his conviction and that the DOJ relied on false testimony. The 11th Circuit affirmed Stein’s criminal convictions.
After Stein was convicted, the SEC argued that his conviction precluded him from contesting the SEC’s allegations in the civil proceeding.
“The district court concluded that Stein’s criminal conviction ‘necessarily decided’ the facts needed to establish his liability in the civil case, and entered summary judgment in favor of the SEC,’ the opinion states.
Stein’s fraudulent scheme in his criminal conviction laid the groundwork for the SEC’s civil complaint. Stein’s violation of the Securities Act and was a major factor in the 9th Circuit’s decision on Stein’s civil appeal.
“Having considered the records in the criminal and civil proceedings in light of the relevant Restatement factors, we conclude that Stein’s conviction determined the identical issues the SEC was required to prove to establish Stein’s liability for securities fraud,” Judge John Wallace wrote. “Both the criminal and civil case involve the same fraudulent scheme carried out by Stein: an effort to inflate Heart Tronics’ stock price by using false purchase orders and false press releases to profit from the sale of the company’s securities.”