Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, February 28, 2007

Lawyer Charged with PIPES fraud

The SEC announced today it filed an injunctive  action  in U.S. District Court for the Southern District  of  New  York  alleging that from approximately January 2006 to February 2007, Louis W. Zehil, a corporate attorney, and two entities he  controlled engaged  in  a fraudulent scheme to sell   millions of shares of securities in violation of the antifraud and registration provisions of the federal securities laws. With  the  consent  of  the parties,  Judge  Preska  entered  an  order  granting  a   preliminary injunction, an asset freeze, the appointment of a receiver  and  other relief.  Zehil was until recently a  partner  with  the  law  firm  of McGuireWoods LLP.

The Complaint alleges that between January  2006  and  February  2007, Zehil represented seven public companies in  issuing  their  stock  in PIPE transactions (private investments in public  equity) and Zehil  personally  invested  in  the issuers'  PIPE  transactions.  In  the subscription agreements for  each  PIPE  transaction,  the  Defendants agreed (as all the PIPE subscribers did) that the shares they received would be issued with  restrictive  legends  until  such  time  as  the issuers filed registration statements  with  the  Commission  and  the Commission declared them effective. As counsel for the issuers,  Zehil then sent letters  to  the  issuers'  transfer  agents  directing  the issuance of shares to the PIPE subscribers. Zehil's letters instructed that all the shares should bear restrictive legends except the  shares issued to his entities.  As a result, the Defendants were able to receive shares without restrictive legends, which they quickly sold into the  public  market, and generated illicit profits of at least $17 million.

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