On September 8, 2021, the SEC charged a Nevada lawyer for playing a crucial role in facilitating the sale of millions of shares of unregistered stock in violation of the federal securities laws.
The SEC’s complaint, Securities and Exchange Commission v. Frederick Bauman,filed in the United States District Court in Nevada, alleges that since 2009 Bauman authored hundreds of opinion letters to transfer agents that his client shareholders of penny stock companies could freely resell their stock exempt from the extensive disclosure provisions required under registration statements filed with the SEC. He often wrote at least three opinions a day and delivered them within one day of his client’s request, leaving little time for due diligence as to whether his clients were in fact affiliates of the issuer. Many of these opinion letters were written at the behest of a single individual on behalf of supposedly independent shareholder entities, but Bauman never spoke to anyone at these entities, and rarely undertook an analysis as to whether his clients were affiliates, only occasionally checking the names of officers and directors of the issuer and whether the shareholder owned at least 10% of the stock or a significant portion of the issuer’s float, the unrestricted stock that is available for trading.
Specifically, the SEC complaint notes that between 2016 and 2019 Bauman issued at least a dozen legal opinions to transfer agents of four public companies falsely claiming that his clients were not affiliates of the relevant issuer—in fact, they were part of a group that controlled the issuer–and thus the securities they owned were unrestricted and freely tradeable without the need for any registration statements filed with the SEC.
As a result of Bauman’s conduct, which helped allow the unregistered sale of millions of shares of stock, he was charged with violating the registration requirements of Sections 5(a) and (c) under the Securities Act of 1933. Without admitting or denying the allegations, Bauman entered into a settlement with the SEC that is subject to court approval in which he consents “to a five-year penny stock bar and a five-year conduct-based injunction that restricts his ability to prepare opinion letters” and agrees to pay a $60,000 civil penalty, $13,000 in disgorgement, and $1,653 in prejudgment interest.
This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association.