U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20021 / February 28, 2007
SEC v. Louis W. Zehil, et al., Civil Action No. 07CV1439 (LAP) (S.D.N.Y.)
SEC Charges Corporate Attorney With Securities Fraud and Obtains Asset Freeze
The Securities and Exchange Commission announced today that it filed an injunctive action in United States District Court for the Southern District of New York alleging that from approximately January 2006 to February 2007, Louis W. Zehil ("Zehil"), a corporate attorney, and two entities he controlled, Strong Branch Ventures IV LP ("Strong") and Chestnut Capital Partners II, LLC ("Chestnut"), engaged in a fraudulent scheme to obtain and sell to the investing public 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, age 41, was until recently a partner with the law firm of McGuireWoods LLP. Zehil is a resident of Ponte Vedra Beach, Florida and worked at the firm's offices in New York, New York, and Jacksonville, Florida.
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). The seven public companies were Gran Tierra Energy, Inc., Foothills Resources, Inc., MMC Energy, Inc., Alternative Energy Sources, Inc., Ethanex Energy, Inc., GoFish Corp., and Kreido BioFuels, Inc. At all relevant times, their common stock was registered with the Commission and quoted on the OTC-BB. In these PIPE transactions (as in PIPEs generally), the investors purchased restricted stock at a discount to market price.
The Complaint also alleges that Zehil personally invested in the issuers' PIPE transactions through Strong and Chestnut. 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, Strong and Chestnut. Zehil's letters stated, falsely, that the shares issued to Strong and Chestnut satisfied legal criteria to be issued without restrictive legend. As a result of their fraudulent conduct, 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
The Court granted, among other relief, a preliminary injunction order which included an asset freeze and the appointment of a receiver over Strong and Chestnut. In its enforcement action, the Commission is seeking additional relief, including orders permanently enjoining Zehil, Strong and Chestnut from committing future violations of the foregoing federal securities laws, and a final judgment ordering Zehil, Strong and Chestnut to disgorge ill-gotten gains, and assessing civil penalties.