Legal opinion letters are issued to transfer agents on behalf of holders of restricted stock seeking to sell the stock freely in the public markets. Transfer agents typically require a lawyer’s opinion explaining the legal basis for lifting the restriction on the stock and allowing it to be freely traded.
The SEC alleges that Brian Reiss of Huntington Beach, Calif., set up 144lettera.com to promote his legal opinion letter business and advertise "volume discount" rates while noting "penny stocks not a problem." Reiss steered potential customers to his website by making bids on search terms through Google’s AdWords, and then relied on a computer-generated template to draft his opinion letters within minutes absent any true analysis of the facts behind each stock offering. The letters from Reiss ultimately made false and misleading statements and facilitated the sale of securities in violation of the registration provisions of the federal securities laws.
"Reiss flouted his responsibilities as a gatekeeper in the issuance of stock, and churned out opinion letters to make a quick buck," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "Attorneys who act as gatekeepers in our markets have a solemn responsibility to ensure that they provide accurate information to the marketplace."
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Reiss falsely claimed he had conducted investigations into various stocks and determined them to be exempt from registration under the securities laws. He misrepresented critical facts, and our enforcement action seeks to bring Reiss’s opinion mill to an end."
According to the SEC’s complaint filed in federal court in Manhattan, Reiss began issuing the fraudulent legal opinion letters in 2008. He advertised a $285 rate for each letter and a "volume discount" rate of $195 per letter. Reiss routinely made inaccurate statements bearing on whether the restriction should be lifted, and failed to conduct even a token inquiry into the underlying facts. He knew or recklessly disregarded the fact that shareholders seeking his opinion letters intended to sell their stock in the public markets, and that transfer agents would rely on his opinion letters to issue stock certificates without restrictive legends.
According to the SEC’s complaint, the false and misleading statements that Reiss made in opinion letters induced transfer agents for several public companies to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public. Reiss provided the opinion letters to transfer agents who required assurances in the form of a legal opinion that the transactions qualified for an exemption from the registration requirements under the federal securities laws. With Reiss’s baseless assurances, the transfer agents issued stock certificates without restrictive legends and enabled the stock to be traded freely.
The SEC’s complaint charges Reiss with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC seeks disgorgement of ill-gotten gains with prejudgment interest and financial penalties. The SEC seeks to bar Reiss from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act. The SEC also seeks permanent injunctions – including an injunction prohibiting Reiss from providing legal services in connection with an unregistered offer or sale of securities.
The SEC’s investigation was conducted by Charles D. Riely and Amelia A. Cottrell – members of the SEC Enforcement Division’s Market Abuse Unit – along with Shannon A. Keyes and Kathy Murdocco of the SEC’s New York Regional Office. The SEC’s litigation will be led by Mr. Riely and Ms. Keyes. The New York office’s broker-dealer examination team of Richard Heaphy, Michael McAuliffe, and Simone Celio, Jr. provided assistance with the investigation.
The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).