Securities and Exchange Commission v. Heart Tronics, Inc., et al., 11-cv-01962 (C.D. Cal.)
The Securities and Exchange Commission recently announced that Martin B. Carter and Ryan A. Rauch have agreed to settle charges brought against them in SEC v. Heart Tronics, Inc., et al. The complaint alleged that Heart Tronics repeatedly announced millions of dollars in fraudulent sales orders for its heart monitoring device between 2006 and 2008 when, in fact, the company never had viable sales orders from actual customers. Carter fabricated numerous documents to support the false disclosures, and also arranged to ship products to a friend to create the illusion that the company was delivering its product to a bona fide customer. The Commission’s complaint also alleged that Rauch solicited numerous investors to buy Heart Tronics stock but failed to disclose that he was being paid by Heart Tronics in exchange for promoting the company.
On October 5, 2011, Carter pled guilty to one criminal count of conspiracy to commit mail fraud, wire fraud and obstruction of justice based on his creation of fake sales orders and other documents for Heart Tronics and providing false and misleading information to Commission staff during the investigation. To settle the Commission’s civil charges, Carter has consented to the entry of a final judgment permanently enjoining him from violating Sections 5(a) and (c) , 17(a)(1) and 17(a)(3) of the Securities Act of 1933 (Securities Act); Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act); and Exchange Act Rules 10b-5(a), 10b-5(c) and 13b2-1; and aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5(a), 10b-5(c), 12b-20, 13a-1, 13a-11, and 13a-13. In addition, Carter has agreed to a permanent penny stock bar pursuant to Section 20(g) of the Securities Act and Section 21(d)(6) of the Exchange Act. Carter’s proposed judgment, which is subject to court approval, will not impose disgorgement or penalties based on Carter’s sworn financial condition.
Rauch has consented, without admitting or denying the Commission’s allegations, to the entry of a final judgment that permanently enjoins him from violating Section 17(b) of the Securities Act, imposes a three-year penny stock bar pursuant to Section 20(g) of the Securities Act, and orders him to pay $15,000 of disgorgement plus prejudgment interest of $2,789.04 and a civil penalty of $20,000. The proposed judgment is subject to court approval.
On December 20, 2011, the Commission filed a civil enforcement action in federal district court in the Central District of California alleging that Heart Tronics, Inc. (formerly known as Signalife, Inc. and Recom Managed Systems, Inc.), and several individuals associated with the Company, engaged in a wide-ranging series of frauds, including the repeated announcement of fictitious sales orders in Heart Tronics’ SEC filings, press releases and other public broadcasts. The fraud schemes were masterminded by Mitchell J. Stein, the purported outside counsel to Heart Tronics and the husband of Heart Tronics’ majority shareholder. From at least December 2005 through September 2008, while he was leading a campaign of public misinformation to drive up the price of Heart Tronics’ stock, Mitchell Stein continuously directed the sale of his and his wife’s Heart Tronics stock through a series of trusts and other nominee accounts for a net profit of more than $5.8 million. On December 13, 2011, a grand jury indicted Stein on 14 criminal counts of conspiracy to commit mail and wire fraud; mail fraud; wire fraud; securities fraud; money laundering; and conspiracy to obstruct justice. The Commission’s civil action against the remaining defendants, including Stein, Heart Tronics’ co-CEOs Willie Gault and Rowland Perkins, and former stock broker Mark Nevdahl, is stayed until the conclusion of the criminal case against Stein.