Metropolitan News-Enterprise

 

Friday, October 12, 2018

 

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Ninth Circuit:

$11 Million-Plus Civil Judgment Against Lawyer, On Suspension, Properly Based on Conviction

Says All That SEC Needed to Prove Was Determined in Criminal Case

 

By a MetNews Staff Writer

 

MITCHELL J. STEIN

Suspended attorney

The Securities and Exchange Commission was properly granted summary judgment in a civil enforcement action against suspended attorney Mitchell J. Stein on the basis of the preclusive effect of his multi-count conviction in connection with stock manipulation, the Ninth U.S. Circuit Court of Appeals declared yesterday.

The opinion, by Senior Circuit Judge J. Clifford Wallace, affirms the Feb. 18, 2015 decision by U.S. District Court Judge  James V. Selna  of the Central District of California who agreed with the position of the Securities and Exchange Commission (“SEC”) that Stein had committed securities violations. The judge ordered that he disgorge $5.378,581.61 in moneys he had obtained through unlawful means, in addition to  $697.833.91 in prejudgment interest, plus a $5,378,581.61 civil penalty, totaling $11,454.997.13.

Selna permanently barred Stein from serving as an officer or director of  a publicly traded company.

The judge acted on the basis of a May 2013 conviction of Stein which the Department of Justice (“DOJ”) obtained in the U.S. District Court for the Southern District of Florida on charges that included securities fraud, mail and wire fraud, and money laundering. The Eleventh U.S. Circuit Court of Appeals affirmed the convictions, but remanded for resentencing.

The SEC’s complaint, against Stein and others, alleged:

“Between December 2005 and December 2008, defendant Mitchell J. Stein…, the purported outside counsel of defendant Heart Tronics, Inc….and husband of its majority shareholder, orchestrated a brazen series of frauds designed to inflate the price of Heart Tronics stock so that he could profit from selling its securities to investors.”

It continued:

“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…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. 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 yesterday’s decision, Senior Circuit Judge J. Clifford Wallace rejected various distinctions Stein sought to draw between what was proven in the criminal case and what the SEC needed to establish.

“[T]he issues the SEC seeks to preclude Stein from litigating in the civil action are identical to the issues litigated and decided in the DOJ’s criminal case,” he wrote. “Accordingly, the district court did not err in entering summary judgment based on the preclusive effect of Stein’s conviction.”

Oral Argument

Florida attorney Robert O. Saunooke represented Stein on appeal. At the oral argument in the case on May 13, Circuit Judge Marsha S. Berzon repeatedly evinced exasperation over Saunooke’s responses, saying that he was not answering her questions.

He insisted the general verdicts in the Florida case do not give rise to issue preclusion, declaring:

“The Supreme Court said you cannot support a collateral estoppel argument with a general criminal verdict.”

Berzon responded:

“Well, you can if the general verdict decides the fact that the civil case turns on. If the general verdict is that this person murdered Jones and the only thing that matters in the civil;  trial is whether he murdered Jones, then that’s good enough.”

Circuit Judge Consuelo M. Callahan told the lawyer:

“Distinctions without a difference aren’t going to help you here.”

Wallace, 89, viewed the argument from his chambers via closed circuit television and asked no questions.

Supreme Court Opinion

In his opinion, Wallace rejected the contention that a general verdict in a criminal case can have no preclusive effect. He cited the U.S. Supreme Court’s 1951 decision in Emich Motors Corp. v. Gen. Motors Corp. which explains “that trial courts assessing the preclusive effect of a prior criminal conviction based on a general verdict determine which issues were necessarily decided by examining the pleadings, evidence submitted, jury instructions, and other parts of the record.”

Stein was arrested Dec. 18, 2011, at Los Angeles International Airport.

At the time the State Bar Court Review Department ordered Stein’s suspension based on the conviction, on Sept. 3, 2013, the lawyer had already been placed on involuntary inactive enrollment by an order of Dec. 29, 2011. On Oct. 26 of that year, Los Angeles Superior Court Judge Jane L. Johnson granted the State Bar’s motion for an assumption of Stein’s practice based on “running and capping.”

 

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