U.S. Securities and Exchange Commission
Litigation Release No. 18757 / June 22, 2004
COMMISSION CHARGES LANDIS ASSOCIATES, LLC, MICHAEL L. HERSHEY, TREMONT MEDICAL, INC., AND ROBERT D. LEAR WITH FRAUD
SECURITIES AND EXCHANGE COMMISSION V. MICHAEL L. HERSHEY, ROBERT D. LEAR, LANDIS ASSOCIATES, LLC, AND TREMONT MEDICAL, INC., Civil Action No. 04-CV-2742 (E.D. Pa.)
The Commission announced that on June 22, 2004, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania, against Landis Associates, LLC ("Landis"), a registered investment adviser located in Kennett Square, PA; its principal, Michael L. Hershey ("Hershey"), who resides in Kennett Square, PA; Tremont Medical, Inc. ("Tremont"), a medical technology company located in Aston, PA; and Robert D. Lear ("Lear"), Tremont's former Chief Financial Officer, who resides in Warrington, PA. The complaint seeks a permanent injunction; disgorgement of ill-gotten gains, together with prejudgment interest; and the imposition of civil penalties against each of the defendants.
The complaint alleges that Hershey, individually and through Landis, egregiously misused client funds and breached his fiduciary duty to a wealthy client (the "Defrauded Client") by investing in Tremont, a privately held "start up" company, of which Hershey was a director and shareholder. Hershey continued to make these investments long after it was clear that the Defrauded Client's account was Tremont's only source of capital and that these investments were worthless.
The Commission's complaint alleges that Hershey used his full discretion over the Defrauded Client's investments to authorize undocumented, uncollateralized, and interest-free cash advances of $8.1 million, which were falsely characterized by Lear and Tremont as purchases of Tremont common stock. The Commission further alleges that Hershey authorized cash advances to Tremont on an open-ended line of credit totaling $4.5 million, which transactions were effected for Tremont through Lear. The complaint charges that Hershey, acting through Landis, concealed the true nature of these transactions, and the resulting decline in value of the Defrauded Client's account, by sending monthly advisory statements he knew to be false.
As a result, the Commission alleges, the Defrauded Client's managed account was overvalued by more than $30 million. Further, because Hershey liquidated many of the Defrauded Client's other investments to make cash available for transfer to Tremont, the complaint alleges that, by the time that the Defrauded Client's account with Landis and Hershey was closed in June 2001, the account had lost nearly 70% of its value and the Defrauded Client had lost all of the money that Hershey invested in Tremont.
The complaint charges the defendants with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thereunder, as well as violating and aiding and abetting violations of Sections 206(1), 206(2), and 204 of the Investment Advisers Act, and Rules 204-2(a)(3) and (7), thereunder.