LawFuel – Law News – MICHAEL J. GARCIA, the United States Attorney for the
Southern District of New York, announced that securities attorney
LOUIS W. ZEHIL was charged today with engaging in a fraudulent
scheme through which he obtained unregistered, restricted
securities issued in “PIPE” transactions, and immediately sold
the shares under the false pretense that they were registered and
freely tradable, reaping illicit profits of more than
approximately $10 million. According to the Complaint filed
earlier today in Manhattan federal court:
ZEHIL, a partner with the McGuire Woods law firm until
he resigned on February 16, 2007, specialized in representing
small companies seeking to become public through reverse mergers
(transactions in which private companies become publicly-traded
via mergers into shell corporations the stock of which is
publicly-traded) and obtaining new capital through private
placements of stock.
In order to generate financing for the
newly-merged public company, ZEHIL assisted these companies in
offering securities in “PIPE” transactions (private investment in
public equity) near the time of their reverse mergers. In such
PIPE transactions, investors commonly commit to purchase a
certain number of restricted shares from an issuer at a specified
price at a discount to the market price (or expected market price
after the reverse merger).
In turn, the issuer agrees to file a
resale registration statement at a later date so that the
investors can sell their shares in the public market.
Under the terms of the PIPE transactions at issue in
this case, as described in the Complaint, the stock issued to the
PIPE investors was not freely tradeable because it was not
registered with the United States Securities and Exchange
Commission (the “SEC”). Consequently, all shares issued in the
PIPE transactions were required to bear restrictive legends until
such time as those shares are registered with the SEC and the SEC
declares the registration statements for those securities
effective. The PIPE investors typically entered into
“registration rights” agreements that allowed them, at a future
date, to register for resale the securities they obtained in the
Between January 2006 and February 2007, ZEHIL
represented the following seven companies in connection with
their issuance of stock pursuant to PIPE transactions: Gran
Tierra Energy, Inc.; Foothills Resources, Inc.; MMC Energy, Inc.;
Alternative Energy Sources, Inc.; Ethanex Energy, Inc.; GoFish
Corp.; and Kreido Biofuels, Inc. (collectively, the “Charged
ZEHIL personally invested in each of the Charged
Transactions through two nominee entities, Chestnut Capital
Partners II (“Chestnut”) and Strong Branch Ventures IV, LP
(“Strong”). Investors in each of the Charged Transactions,
including ZEHIL, through Strong and Chestnut, agreed that the
shares they received would bear restrictive legends (that would
prevent their resale) until such time as the issuers filed
registration statements with the SEC and the SEC declared the
registration statements effective.
ZEHIL, as counsel for the issuers in the Charged
Transactions, sent opinion letters to the issuers’ stock transfer
agents directing that all of the issued shares should bear
restrictive legends except the shares issued to ZEHIL’s nominees,
Strong and Chestnut. ZEHIL’s letters falsely claimed that the
shares issued to Strong and Chestnut satisfied legal criteria
permitting them to be issued without a restrictive legend. As a
result, ZEHIL was able to receive shares without restrictive
legends and, almost immediately thereafter, he sold them in the
public market. In all cases, he did this before the issuers had
filed registration statements with the SEC.
By obtaining stock free of the restrictive legends, ZEHIL was able to sell these shares immediately in the public market at a profit in advance of the other PIPE investors. The Complaint alleges that ZEHIL
reaped over $10 million in profit through these illicit sales.
This matter was reported to the United States
Securities and Exchange Commission by the McGuire Woods law firm,
which is cooperating with the Government investigations.
ZEHIL, 41, is a resident of Jacksonville, Florida.
ZEHIL surrendered today and will be presented before a United
States Magistrate Judge. If convicted, ZEHIL faces a maximum
sentence of 20 years’ imprisonment and a fine the greatest of $5
million, twice the gross gain from the offense, or twice the loss to the victim.
Mr. GARCIA praised the efforts of the Criminal
Investigators of the United States Attorney’s Office in this
investigation, and thanked the Securities and Exchange Commission
for its assistance in the investigation of this case. Mr. GARCIA
also said the investigation is continuing.
Assistant United States Attorney JOSHUA KLEIN is in
charge of the prosecution.
The charges contained in the Complaint are merely
accusations, and the defendants are presumed innocent unless and
until proven guilty.