Securities and Exchange Commission v. Bauman

On September 8, 2021, the United States Securities and Exchange Commission (the “SEC” or “Plaintiff”), represented by Eric Forni, Kathleen Shields, and Nita Kumaraswam Klunder, attorneys at SEC’s New York regional office, filed a civil enforcement action against Frederick Bauman (“Bauman” or “Defendant”). Plaintiff filed suit seeking injunctive relief and disgorgement of all ill-gotten gains along with pre-judgement interest for the alleged misleading opinion letter of the Defendant. This case was filed in the U.S. District Court in the District of Nevada.

In the complaint Plaintiff alleged that, “Bauman, a licensed attorney who specialized in securities law and securities transactions, was a necessary participant and substantial factor in sales of securities of public companies under circumstances where the sales were legally required to be registered with the SEC but they were not. This complaint focuses on his actions with respect to the stock of four public companies between 2016 and 2019. As an attorney, Bauman authored at least a dozen attorney opinion letters stating his view that securities owned by certain shareholders of those four public companies could be freely traded to investors in the public markets. These opinion letters were misleading in certain ways. In fact, the securities owned by these shareholders were not freely tradeable and Bauman’s opinion letters facilitated the unregistered sales of securities by these shareholders.”

Plaintiff further alleged that, “Bauman’s clients, on whose behalf he wrote the opinion letters, were actually part of groups that controlled the companies whose stock they owned (“Control Groups”), and because of this they were “affiliates” of the companies under the securities laws enforced by the SEC. Bauman’s misleading opinion letters enabled his Control Group clients illegally to sell their shares in violation of federal securities laws. Bauman’s opinion letters falsely represented that the shareholders on whose behalf he was writing were not “affiliates” of the companies whose stock they owned. Bauman sent those letters to transfer agents – entities that record the ownership and transfer of securities, and thus routinely track whether particular securities are subject to resale restrictions.”

Plaintiff also alleged that, “Bauman knew that the purpose of his letters was for the transfer agents to treat the stock as unrestricted, and record transfers on that basis. But for Bauman’s opinion letters, the transfer agent would not have issued the stock without a restrictive legend. Bauman’s letters thereby facilitated his clients’ illegal stock sales. Bauman’s opinion letters facilitated the dumping of at least the securities of EnviroTechnologies International, Inc. (“EnviroTechnologies”; Ticker: ETII), Cyberfort Software, Inc. (“Cyberfort”; Ticker: CYBF), Blake Insomnia Therapeutics, Inc. (“Blake”; Ticker: BKIT), and Sandy Steele Unlimited Inc. (“Sandy Steele”; Ticker: SSTU).”

There is only one claim for relief laid down by Plaintiff which deals with the alleged unregistered offer and sale of securities in violations of Sections 5(a) and 5(c) of the Securities Act.

In its prayer for relief, Plaintiff has requested the court for a judgment in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure to enjoin Bauman from directly or indirectly providing, or receiving compensation from the provision of professional legal services to any person or entity in connection with the offer or sale of securities. Plaintiff also requested the court to order Bauman to pay a civil penalty under Section 20(d) of the Securities Act and to disgorge all ill-gotten gains with prejudgment interest.

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