SEC's Carnegie Suit Claims Leaches Bled Investors Dry

Roughly a year after Carnegie Asset Management made a minitender offer for shares of Mattel ( MAT), the Securities and Exchange Commission filed a lawsuit alleging that the firm's principals engaged in securities fraud.

Carnegie Investment Management and LMC Assets, run by Jeffrey and Hubert Leach, never paid investors who tendered Mattel shares in November of last year, the agency said. The brothers, according to the SEC suit and several related filings in Philadelphia bankruptcy courts, used the shares as collateral for margin loans to finance trading in other stocks.

Related Stories
Carnegie Investment's Mattel Disaster Points Up Dangers of Mini-Tenders
Tips for the Timid: How to Detect Financial Fraud and Other Stock Shenanigans
Barad Just Should Have Listened to Herb

The SEC suit, filed in U.S. District Court in Philadelphia, alleges the brothers had previously made similar offers for shares of the Fleming Cos. ( FLM) and Fruit of the Loom ( FTL). Minitender offers are solicitations made to buy less than 5% of a company's outstanding shares, and have become a concern for investors because the process isn't bound by the regulatory strictures of full-fledged tender offers, which require detailed filings.

The SEC asked the court to compel the Leach brothers, who established Carnegie as a Cayman Islands corporation and traded through tiny First Colonial Securities in Boca Raton, Fla., to return any gains and repay investor losses, which were estimated at $1.4 million.

The Leaches, who ran their operation from a small office in Philadelphia, made $4.5 million in unlawful profits, the SEC charges. That didn't stop Carnegie from filing for bankruptcy when First Colonial's clearing firm, PaineWebber, froze their account pending payment for the stock collected in the Mattel tender offer.

The SEC's suit alleges the Leach brothers' tender offers contained material omissions and false statements about the offer's intent, were structured without the use of any escrow account or independent receiving agent and failed to disclose they were unable to pay for the shares. It also claims they made false and misleading statements outside of the offering documents, such as pledging to pay for shares by a certain date, and not completing the transaction.

Attorneys for the Leaches could not be reached.

More from Stocks

Futures Fall on Further Trade Rhetoric from China and 4 Other Stories to Watch

Futures Fall on Further Trade Rhetoric from China and 4 Other Stories to Watch

Trade Tussle Sinks Stocks, Oil Slides, Micron, Daimler - 5 Things You Must Know

Trade Tussle Sinks Stocks, Oil Slides, Micron, Daimler - 5 Things You Must Know

Chart: Goldman Sachs Doesn't See U.S. Economy Falling Apart Anytime Soon

Chart: Goldman Sachs Doesn't See U.S. Economy Falling Apart Anytime Soon

Dow Gets Swept Into Nasty Reversal Even as Nasdaq Posts New Record

Dow Gets Swept Into Nasty Reversal Even as Nasdaq Posts New Record

REPLAY: Jim Cramer on Fed Rate Hikes, Oil Prices and Starbucks Worries

REPLAY: Jim Cramer on Fed Rate Hikes, Oil Prices and Starbucks Worries