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KAREN MATTESON, Cal. Bar No. 102103
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA SOUTHERN DIVISION
Plaintiff Securities and Exchange Commission ("Commission") alleges: JURISDICTION AND VENUE 1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1), and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) & 77v(a), and Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa. 2. Venue is proper in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the laws alleged herein occurred within the Central District of California and because the defendant resides in this district. SUMMARY 3. From December 1998 through May 2000, Defendant Gregory A. Hinkson ("Hinkson"), then a registered representative at the Newport Beach, California, branch office of Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), engaged in unauthorized trading of securities in five of his clients' accounts and misappropriated $327,356 from those accounts. In addition to misappropriating funds, Hinkson received $10,016 in commissions as a result of his unauthorized purchases of stock in one client account. 4. Hinkson violated the antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. The Commission therefore requests that this Court: (a) permanently enjoin Hinkson from future violations of the above provisions of the federal securities laws; (b) order Hinkson to disgorge all of his ill-gotten gains, plus interest; and (c) order Hinkson to pay a civil penalty. THE DEFENDANT 5. Gregory A. Hinkson resides in Irvine, California. Hinkson worked at Merrill Lynch as a registered representative from July 1997 until Merrill Lynch terminated him in June 2000. In July 2001, Hinkson consented to a censure and permanent bar by the New York Stock Exchange in a case against him concerning the conduct alleged below. 6. During the relevant period, Hinkson solely controlled the bank accounts of two corporations, Infant Athletics, Inc., ("Infant Athletics") and TZ Acquisition, Inc. ("TZ Acquisition"). As alleged below, Hinkson deposited and withdrew monies from these corporations' bank accounts in furtherance of his fraudulent scheme to misappropriate client funds. HINKSON'S FRAUDULENT SCHEME 7. On December 7, 1998, Hinkson misappropriated $340,000 from Client A as follows. Hinkson first sold securities consisting of 340,000 Merrill Lynch Cash Management Account ("CMA") money fund shares held in a Client A account. The CMA money fund consists of fixed income securities such as United States Government securities, United States Government agency securities and other short term securities. Each CMA share is worth one dollar. After selling the 340,000 CMA shares, Hinkson then caused a check for the $340,000 in proceeds to be issued from Client A's account, payable to Hinkson's company, Infant Athletics. This transaction was never authorized by Client A. 8. On December 7, 1998, Hinkson deposited the $340,000 check from Client A into Infant Athletics' bank account. Hinkson then used these misappropriated funds to write thirty-three checks to himself totaling $89,090 from December 1998 to June 1999, three checks to cash totaling $144,924 from December 1998 to March 1999, and one check to a Chevrolet dealership for $35,103.22 on December 21,1998. 9. On March 5, 1999, Hinkson forged the signature of another client, Client B, on a transfer of funds authorization form, and then used the forged form to cause the sale of 344,192 CMA shares and the transfer of the $344,192 in proceeds from one of Client B's accounts to one of Client A's accounts on March 9, 1999. Hinkson transferred the funds to replace the $340,000 he had previously misappropriated fromClient A's account on December 7, 1998, plus $4,192 in interest. Client B never authorized this transfer. 10. On March 24, 1999, Hinkson deposited a cashier's check for $100,000, drawn on his Infant Athletics account, into Client B's account to replace some of the $344,192 previously transferred out of Client B's account on March 9, 1999. 11. Two days later, on March 26, 1999, Hinkson caused the sale of 150,000 CMA shares and the transfer of the $150,000 in proceeds from Client A's account to a second account held by Client B. This transfer was never authorized by Client A. 12. On March 31, 1999, Hinkson deposited a check for $150,144, drawn on TZ Acquisition's account at Bank of America, into Client A's account to replace the $150,000 he had previously misappropriated from Client A's account, plus $144 in interest. 13. On September 14, 1999, Hinkson forged Client B's signature on two forms which authorized the sale of a total of 177,000 CMA shares and transfer of the $177,000 in proceeds from Client B's second account. These letters purportedly authorized transfers of funds from Client B's account to the account of Client C of $167,000, and to the account of Client D of $10,000. Clients C and D had previously invested funds with Hinkson's company, TZ Acquisition. Hinkson used the funds from Client B's account to purportedly return funds invested by Clients C and D to them. Client B never authorized the transfers to Clients C and D. 14. In October 1999, Client B discovered that $177,000 had been transferred out of his second account and questioned Hinkson about the transfer. Hinkson falsely represented to Client B that a mistake had been made and that the money would be replaced with interest. On November 1, 1999, Hinkson forged the signatures of three officers of ClientA on an authorization letter, causing the sale of 178,213 CMA shares and transfer of the $178,213 in proceeds from a second Client A account to Client B's second account on November 2, 1999. This transfer was never authorized by Client A. 15. To cover up the transfer from Client A's account to Client B's account, on February 2, 2000, Hinkson forged Client E's signature on an authorization letter, causing the sale of 190,000 CMA shares and transfer of the $190,000 in proceeds from Client E's account into Client A's second account on February 3, 2000. Client E never authorized this transfer. 16. In March 2000, Client E's husband noticed the $190,000 transfer from the account and questioned Hinkson about the transfer. Hinkson falsely represented to him that a mistake had been made in the account and that the funds would be replaced with interest the following month. 17. On April 3, 2000, Hinkson forged the signatures of Clients F and G on an authorization letter, causing the sale of 193,720 CMA shares and the transfer of the $193,720 in proceeds from their joint account into Client E's account. Neither Client F nor Client G ever gave Hinkson authority to transfer these funds. 18. Client F confronted Hinkson with this unauthorized transaction, and he falsely represented to her that a clerical error had been made between the account of Clients F and G and Client E's account and that the funds had been put back into the account of Clients F and G with interest. On April 25, 2000, Hinkson deposited a check for $194,424 drawn on TZ Acquisition's account at Merrill Lynch into the account of Clients F and G. 19. Hinkson had funds available in TZ Acquisition's accountto transfer $194,424 to the account of Clients F and G because on April 20, 2000, Hinkson had forged Client H's signature on an authorization letter, causing the sale of 250,000 CMA shares and the transfer of the $250,000 in proceeds from Client H's account into TZ Acquisition's account on April 24, 2000. Client H never authorized this transfer. 20. On May 4, 2000, Hinkson telephoned Client H and falsely represented to her that a mistake had been made in her account and that she would receive her funds back with interest. 21. On May 5, 2000, Hinkson forged the signatures of three officers of Client A on an authorization letter, causing the sale of 250,500 CMA shares and the transfer that same day of the $250,500 in proceeds from Client A's second account into Client H's account to replace the $250,000 he had previously misappropriated from that account, plus $500 in interest. This transfer was never authorized by Client A. 22. Client B lost a total of $92,979 from his two accounts at Merrill Lynch, while Client A lost a total of $234,377 from its two accounts at Merrill Lynch. Thus, as a result of Hinkson's fraud, these two clients lost a total of $327,356. 23. In addition to misappropriating funds from his clients' accounts, between April 24, 2000 and May 11, 2000, Hinkson made 38 unauthorized purchases of Advanced Refrigeration Technologies stock, totaling 130,000 shares, for Client A's second account at Merrill Lynch. Hinkson used $295,090 of Client A's funds, without Client A's knowledge or authorization, to purchase the stock. As a result of these unauthorized trades, Hinkson received $10,016 in commissions. FIRST CLAIM FOR RELIEF FRAUD IN THE OFFER OR SALE OF SECURITIES Section 17(a) of the Securities Act of 1933 15 U.S.C. § 77q(a) 24. Paragraphs 1 through 23 are realleged and incorporated herein by reference. 25. Hinkson, by engaging in the conduct described in paragraphs 3 through 23 above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails: a. with scienter, employed devices, schemes or artifices to defraud; b. obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or c. engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon the purchasers of such securities. 26. By reason of the foregoing, Hinkson violated, and unless enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). SECOND CLAIM FOR RELIEF FRAUD IN CONNECTION WITH THE PURCHASE OR SALE OF SECURITIES Section 10(b) of the Securities Exchange Act of 1934 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 27. Paragraphs 1 through 23 are realleged and incorporated herein by reference. 28. Hinkson, by engaging in the conduct described in paragraphs 3 through 23 above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter: a. employed devices, schemes or artifices to defraud; b. made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or c. engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons. 29. By reason of the foregoing, Hinkson violated, and unless enjoined will continue to violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue findings of fact and conclusions of law that Hinkson committed the alleged violations; II. Issue in a form consistent with Fed. R. Civ. P. 65, an order permanently enjoining Hinkson and his agents, servants, employees and those persons in active concert with any of them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; III. Order Hinkson to disgorge all ill-gotten gains derived directly or indirectly from his illegal conduct, together with prejudgment interest thereon; IV. Order Hinkson to pay a civil penalty under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990; and V. Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. DATED: July 16, 2002 _____________________________
http://www.sec.gov/litigation/complaints/comp17621.htm
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