U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20401 / December 17, 2007
Securities and Exchange Commission v. Don Warner Reinhard, (U.S. District Court for the Northern District of Florida, Case 4:07-CV-00529-RH-WCS (filed December 13, 2007)
The Securities and Exchange Commission today announced the filing of a civil action in federal district court in the Northern District of Florida against Don Warner Reinhard of Tallahassee, Florida, to restrain and enjoin Reinhard from violating the federal securities laws in connection with the offer and sale of securities. The SEC alleged in its complaint that from at least January 2002 through August 2003, Reinhard, through his wholly owned investment adviser, Magnolia Capital Advisors, Inc. (“Magnolia Capital”), made false and misleading statements and omissions of material fact to his clients in connection with the offer and sale of collateralized mortgage obligations (“CMOs”). Specifically, Reinhard misrepresented the safety of principal in the highly leveraged CMOs he purchased for his clients’ accounts and the account of Magnolia Capital Partners, L.P. (“Magnolia Partners”), a hedge fund he controlled as the general partner, according to the complaint. The complaint also alleges Reinhard omitted to disclose to his clients and in filings with the Commission a lawsuit by the Florida Department of Insurance against him involving CMO investments and allegations of fraud. In addition, during July and August 2003, as market values of the CMO investments declined, Reinhard engaged in a fraudulent scheme to artificially increase the equity in certain brokerage accounts and avoid margin calls, according to the complaint. The SEC alleges Reinhard did this by temporarily “parking” the CMO investments in the accounts of a third party, while falsely reporting the nature of the transactions to his broker-dealer and clearing firm.
The SEC also alleges that at least between December 2002 and June 2003, Reinhard provided his hedge fund clients with false quarterly account statements showing materially inflated account valuations. Through all this activity, Reinhard’s clients and hedge fund investors lost more than $6 million, according to the complaint.
Based on this conduct, the SEC charged Reinhard with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940 (“Advisers Act”), and aiding and abetting violations of Sections 204 and 206(4) of the Advisers Act and Rules 204-2(a)(7) and 206(4)-4 thereunder. The Commission seeks a permanent injunction against Reinhard and an order for disgorgement of all ill-gotten gains plus prejudgment interest and an order imposing a civil money penalty.