U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22204 / December 20, 2011
SEC v. Heart Tronics, Inc., et al., Case No. SACV-11-1962-JVS (ANx) (C.D. Cal.)
SEC Charges Heart Tronics, Inc. and Six Individuals in Connection with a Series of Fraudulent Schemes Pumping Company Stock
The Securities and Exchange Commission filed a lawsuit today in federal court in Los Angeles charging seven defendants, including California lawyer Mitchell J. Stein, in a series of brazen fraudulent schemes designed to artificially inflate the securities of Heart Tronics, Inc., f/k/a Signalife, Inc. (Heart Tronics), while Stein secretly made millions of dollars from selling the stock. The seven defendants charged are:
In a parallel criminal investigation, the U.S. Department of Justice and U.S. Postal Inspection Service announced today the arrest of Stein.
The SEC’s complaint alleges that Heart Tronics fraudulently and repeatedly announced millions of dollars in sales orders for its product between 2006 and 2008. In fact, according to the complaint, Heart Tronics never had viable sales orders from actual customers, but Stein and Carter fabricated numerous documents to support the false disclosures to the public. As alleged in the complaint, Stein profited by causing Heart Tronics to unlawfully pay Carter approximately $2 million in cash and Heart Tronics stock pursuant to a sham consulting agreement. Carter kicked-back substantially all the proceeds to Stein.
The complaint also alleges that in 2008 Heart Tronics installed Gault, a celebrity athlete, and Perkins, a founder of a well-known talent agency, as figurehead CEOs to generate publicity for Heart Tronics and foster investor confidence. However, the SEC alleges that Gault and Perkins rarely questioned Stein’s fraudulent agenda and abdicated their fiduciary responsibilities to shareholders by signing, or authorizing to be signed, false SEC filings and false certifications under the Sarbanes-Oxley Act of 2002. In addition, the complaint alleges that Stein and Gault together defrauded an individual investor into making a substantial investment in Heart Tronics based on false representations that his capital would fund the company’s operations. Instead, Stein and Gault diverted the investor’s proceeds for their personal use, including purchasing Heart Tronics stock in Gault’s personal brokerage account to create the appearance of volume and demand for the stock.
Stein also hired promoters to tout Heart Tronics stock on the Internet. According to the complaint, one such promoter, Rauch, solicited numerous investment advisers, retail and institutional brokers, and other investors to buy Heart Tronics stock, but failed to disclose he was being paid by Heart Tronics in exchange for his promotion.
While Stein was orchestrating his campaign of misinformation and other schemes designed to inflate Heart Tronics’ stock price, the complaint alleges that he and his wife, Tracey Hampton-Stein (Hampton-Stein), 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 the federal securities laws. Stein enlisted Nevdahl, a stock broker, 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; according to the complaint, Nevdahl met the Steins’ regular demands for cash by continually selling Heart Tronics stock though the trusts.
The SEC’s complaint charges the following defendants committed the following violations of the federal securities laws:
The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil monetary penalties from all defendants. With respect to Stein, Gault and Perkins, the complaint seeks the imposition of permanent officer-and-director bars; with respect to Stein, Gault, Perkins, Carter and Rauch, the complaint seeks the impositions of permanent penny stock bars. The complaint also seeks the return of ill-gotten gains from nine relief defendants, including Hampton-Stein and her company, ARC Finance Group LLC, Heart Tronics’ majority shareholder.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 Commission acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the U.S. Postal Inspection Service.