June 11, 2013 — In 2010, the Dodd-Frank Act created a Securities and Exchange Commission (SEC) whistleblower program to help the agency collect and investigate tips from individuals willing to collaborate with the government to stop fraudulent activity in the securities industry. Under the Dodd-Frank Act, an informant with unique information may keep as much as thirty percent of the amount collected by the government, so long as the sum collected tops $1 million.
Lawyer Creates Phony Company “Sales” to Inflate Stock Price
Mitchell J. Stein, a lawyer from Hidden Hills, California, has been convicted for running a five-year-long market manipulation and fraud scheme worth millions of dollars, the U.S. Department of Justice has announced.
The fraud scheme involved a publicly traded company known as Signalife Inc. (now called Heart Tronics), in which Stein’s wife owned a controlling interest. The business ostensibly sold electronic devices for heart monitoring. At trial, the evidence demonstrated that Stein devised a scheme by which he and his co-conspirators could artificially inflate the value of Signalife stock by making it appear that the company was generating a significant amount of sales, even though it was not. Stein and his cohorts created phony purchase orders from fictitious customers and then had Signalife products shipped to someone who had not in reality purchased any products. Once it appeared that the company had a successful sales history, Stein had Signalife announce the sham sales in documents filed with the U.S. Securities and Exchange Commission (SEC). In addition, Stein caused the company to issue falsified press releases about the phony sales activity.
After driving up the share price of Signalife stock by manufacturing phony sales, Stein sold off shares in the company, but disguised the activity by putting shares in allegedly blind trusts and by having a co-conspirator sell the stock for him and then turn over the proceeds of the stock sales. In just one of these disguised transactions, Stein profited by more than $1.8 million.
When the SEC began investigating Heart Tronics, Stein attempted to cover his tracks with false testimony. While the SEC pursued a civil enforcement action against Stein and his co-conspirators, the Justice Department focused on the criminal charges. At sentencing in August, Stein could receive a decades-long prison term.
Company Insiders Work With Government on Securities Fraud
Company insiders are generally the best situated to uncover phony scams to drive up stock values and then sell off shares for an illicit profit. Before they notify the SEC’s whistleblower program, though, tipsters should learn about all applicable entitlements and restrictions under the Dodd-Frank Act. Whistleblowers who want to remain anonymous, for example, cannot contact the SEC directly. Instead, an SEC fraud lawyer must act on their behalf. The securities fraud attorneys with Waters & Kraus have long experience in protecting government collaborators. Contact us by email or phone our whistleblower lawyers at 800.226.9880 to learn more about our whistleblower practice.