SEC Dethrones ‘Penny Stock King’ Sterns : Fraud: Record judgment in huge fraud case includes $12-million order for restitution and lifetime ban from running any publicly traded company.
LOS ANGELES — The Securities and Exchange Commission won a record judgment Tuesday against Orange County’s so-called “penny stock king†David D. Sterns, including more than $12 million in restitution and a lifetime ban from ever running another publicly traded company.
Once an accountant for Arthur Andersen & Co., Sterns was accused last year of stealing $10 million from thousands of investors nationwide--including Olympic swimming champion Mark Spitz--through a Laguna Hills-based penny stock empire known as the Ultimate Business Network.
U.S. District Judge Edward Rafeedie granted the SEC unprecedented punishments against Sterns and several associates after they failed to mount any defense against the agency’s accusations.
The SEC has said Sterns and his associates sold 36 million shares of unregistered stock to the public and hyped a number of bogus products including a diet patch worn on the bicep or chest that was supposed to suppress the wearer’s appetite.
“It was a very large fraud,†said Eva Heffernan, branch chief of enforcement in the agency’s Washington headquarters.
Despite the judge’s order, Ultimate Business Network investors may not see much in the way of refunds. Heffernan said that they will have to stand in line with Sterns’ other creditors and that it’s unclear whether he has the money to pay the judgment.
“I have no idea if he is going to come up with $12 million,†Heffernan said.
Besides restitution and the ban, Rafeedie said that later this year he would impose civil penalties against Sterns, the first time the SEC has ever won court approval to fine a defendant in a penny stock fraud case. Before Tuesday, the SEC had obtained penalties only in insider trading cases. Sterns could be fined up to $100,000 per violation.
“This is the first case of its kind in which the court has gone this far and ordered relief this extensive to a repeat securities violator like David Sterns,†Heffernan said.
The SEC over the next few months will calculate the number of violations that Sterns allegedly committed after the penny stock reform act went into effect and then ask Rafeedie to impose the appropriate fine.
Sterns, 55, was the first Californian and only the second person nationally to be sued under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The act permitted the SEC to seek civil penalties and the kind of career ban issued against Sterns.
Congress enacted the legislation last October in an effort to contain penny stock fraud, which costs investors about $2 billion annually.
Rafeedie’s judgment further prohibits Sterns from buying any over-the-counter stocks and limits any purchases on the New York Stock Exchange and similar markets to $10,000 in any single company.
“He is totally out of the over-the-counter market,†Heffernan said. “We want to make sure he is forever barred from participating in that market.â€
Sterns could not be reached for comment Tuesday, but he said in an April interview that he was innocent of the charges against him and accused regulators of carrying out a “witch hunt.†He acknowledged that he is the subject of a criminal federal grand jury investigation--in addition to the SEC action--related to Ultimate Business Network.
On Tuesday, criminal prosecutors said that investigation is continuing.
SEC officials say Sterns--a talkative man who has publicly commented on everything from the nation’s moral fiber to the blandness of some housing in South Orange County--portrayed himself as a financial Hercules.
He supposedly told investors that he had taken 116 companies public with no regulatory problems, that he was the most quoted person in the Wall Street Journal in the 1970s, that he had been featured on the cover of Fortune magazine, that he owned 1% of the landmass of Panama and that he had helped liberate the Marshall Islands.
Sterns denies ever making those claims.
Over the years, after consumers filed fraud complaints, Sterns faced run-ins with various federal and state agencies, including the Internal Revenue Service, Department of Corporations, Department of Health Services, U.S. Food and Drug Administration, U.S. Postal Inspection Service, California attorney general, Orange County district attorney and the State Board of Equalization.
Rafeedie on Tuesday also ordered several Ultimate Business Network associates not to engage in future violations of securities laws. They include Sterns’ daughter, Debra, 27, of Newport Beach; Lee Shrout, 57, of Phoenix and Martha Kreider, 48, also of Phoenix.
Penalties for the ‘Penny Stock King’
The Securities and Exchange Commission’s action against Orange County penny stock king David D. Sterns orders him: * To pay $12.1 million in restitution and additional court-ordered fines. * Not to serve as officer or director of any publicly traded company in the future. * Not to buy or sell more than $10,000 worth of stock in any public company. * Not to buy any over-the-counter stock. * Not to sell any stock other than his personal holdings. * Not to plan or implement a merger or acquisition of a public company. * To submit to an accounting of all his personal assets.
Below is a list of Southland companies that were members of the Laguna Hills-based Ultimate Business Network: * Acrotech Inc. * Advanced Technical Systems * Advanced Transdermal Systems Inc. * Ameritex Inc. * Applied Business Systems * Ayin Corp. * Fountain Industries * Genex Industries Inc. * Gentre Laboratories Inc. * Gold Equities Inc. * Huntor Group * New Source Ltd. * OmniSource Inc. * Primeritexx Inc. * Protectin Corp.
Sign up for Essential California
The most important California stories and recommendations in your inbox every morning.
You may occasionally receive promotional content from the Los Angeles Times.
