Attorneys who may think they can give short shrift to those pesky legal opinions to transfer agents might think twice after reading this complaint, SEC v. Frederick Bauman, filed on September 8, 2021, in the federal district court in Nevada. As described in the SEC’s litigation release, the SEC charged Bauman “with playing a critical role as an attorney who facilitated the unregistered sale of millions of shares of securities by two groups engaged in securities fraud.” According to the SEC’s complaint, between 2016 and August 2019, Bauman issued at least a dozen legal opinions to transfer agents advising that certain shares of four public companies were unrestricted and freely tradeable and that the holders of the shares were not affiliates of the public company issuers. However, the SEC alleged, the shareholders were actually part of groups that controlled those issuers, which made them affiliates under the securities laws. In “each instance where Bauman’s opinion letters violated Section 5,” the SEC alleged, “he lacked a reasonable basis for representing that the shareholders were not affiliates.” The complaint charged that the sales by these control groups were unregistered and violated Section 5 of the Securities Act and that Bauman violated Sections 5(a) and 5(c) of the Securities Act.
According to the complaint, since 2009, Bauman issued hundreds of legal opinions to transfer agents indicating that “various shareholders were entitled to hold and sell certain shares free of a restrictive legend. During that time Bauman typically wrote three such opinion letters per business day, and endeavored to send them to his clients within twenty-four hours of a client’s request. In some instances, he completed opinion letters within hours, if not minutes, of a client’s request. This left little, if any, time to conduct diligence.”
In particular, since 2015, at the request of one person, Bauman wrote dozens of opinions for various shareholders, in many cases, the SEC alleged, where the issuers “had recently undergone changes in corporate structure and stock ownership structure. These types of changes are common features of stock manipulation schemes and information regarding these changes was readily available to Bauman through public sources at the time.” According to the complaint, the person concealed the control of the stock of these companies by dividing the stock ownership “between a group of purportedly distinct corporate shareholders. These corporate shareholders were actually nominees….” The person told Bauman that he was acting on behalf of a “family office” that was the person’s client. However, the SEC alleged, Bauman “never undertook to understand the scope of that client relationship,” nor did he question the absence of appropriate names on paperwork, why the person paid for all the opinions and other services Bauman provided, or whether the person or the shareholders had control relationships with the companies at issue or were acting in coordination. Bauman’s inquiry prior to rendering an opinion, the SEC alleged, was generally limited to whether the issuer was a shell company and whether the shares complied with the requisite holding period.
With regard to his determination of non-affiliate status, the SEC contended that he “occasionally” checked the names of a company’s officers and directors and whether the shareholder was a 10% holder. Although he was aware that “holding a large percentage of the float could be a ‘red flag,’… he did nothing to determine the percentage of the float (or unrestricted stock) his opinion letters covered.” However, his opinions “often covered nearly the entire float of the particular issuer.” These sales by affiliates, the complaint alleged, violated the Rule 144 volume limitations. Bauman knew, the SEC alleged, that transfer agents would rely on his opinions in treating the shares as unrestricted sales by non-affiliates and recording transfers on that basis.
The SEC alleged that Bauman’s opinions to transfer agents “facilitated sales of millions of shares that could not legally be sold to the public without a registration statement” and charged Bauman with violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. Under the settlement, which is subject to court approval, Bauman will be subject to a “five-year penny stock bar and a five-year conduct-based injunction that restricts his ability to prepare opinion letters,” and will pay penalties and disgorgement of $74,653.
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