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Ex-NFL player Gault snagged in SEC fraud case

By Sarah N. Lynch and Aruna Viswanatha

WASHINGTON (Reuters) - Willie Gault, a former Chicago Bears wide receiver, faces a civil lawsuit by U.S. securities regulators accusing the American football player and several others of engaging in an alleged scheme to inflate the price of stock in a heart-monitoring device company.

The U.S. Securities and Exchange Commission said in a complaint filed on Tuesday in federal court in California that the company, known as Heart Tronics, installed both Gault and a former Hollywood executive named J. Rowland Perkins as figureheads of the company to help fuel publicity and pump up investor confidence.

Behind the scenes, however, Mitchell J. Stein, the company's purported outside counsel, was conducting shady dealings that included hiring stock promoters and reaping about $8 million from secret trades that he used to spend on private jets and fancy cars, the SEC said.

The attorney, Mitchell Stein, was arrested on Sunday at Los Angeles International Airport, the Justice Department said.

In an indictment unsealed on Monday in federal court in Florida, prosecutors charged Stein with engaging in a scheme to artificially inflate the company's stock price by creating fake purchase orders from fictitious customers, then issuing press releases trumpeting the fake sales.

Federal prosecutors also charged Stein with conspiring to obstruct the SEC investigation by testifying falsely and arranging for others to do so.

A message left at Stein's law office was not immediately returned on Tuesday. His most recent message on Twitter, posted on the day of his arrest, read: "As long as the roots are not severed, all is well ... and all will be well ... In the garden."

"Stein took advantage of Gault's celebrity to further prop up the image of Heart Tronics as a successful enterprise," said Stephen L. Cohen, an associate director in the SEC's Division of Enforcement. "Stein secretly sold millions of dollars in stock while peddling false claims of Heart Tronics' lucrative sales orders, and has been living the high life off his illicit proceeds with multiple homes, exotic cars, and private jets."

This marks the second civil case the SEC has filed against a former football player in a stock scheme in less than a week. On Friday, the SEC charged Daniel Ruettiger, the legendary Notre Dame football underdog who inspired the 1993 movie "Rudy," and 12 others with running a stock scam.

The charges against Gault and Perkins center on violations of the Sarbanes-Oxley Act, a law enacted in 2002 that, among other things, imposes certain fiduciary obligations on company executives.

The SEC says that Stein and Gault defrauded one investor into taking a stake in the company by falsely promising the money would go toward company operations.

Some of that money instead went into Gault's personal brokerage account to buy more Heart Tronics stock and give investors a false sense of demand and volume, the SEC claims.

The SEC also said that Gault and Perkins rarely questioned Stein's direction and unlawfully signed public filings containing false statements about the company's sales.

Jared J. Scharf, an attorney representing Gault, Perkins and Heart Tronics, said the SEC's allegations are completely baseless and he believes that the agency's complaint is based on information provided by naked short-sellers trying to take over the company.

"We informed the SEC about ... the naked short-sellers. And to our knowledge, the SEC has done nothing about it," he said. "We suspect that when the naked short-selling didn't accomplish their objective, ... they became the informants to the SEC on whose word this civil action is based."

Scharf said his clients testified to the SEC about the issues raised in this case in 2010, and the agency issued a Wells notice in June of this year. Since then he had not heard from regulators and thought they had dropped the matter.

The SEC's suit will likely put a damper on Gault's recent euphoria after the Los Angeles Police recovered his stolen Super Bowl XX ring. Gault credited the website TMZ with assisting in the search.

(Reporting By Sarah N. Lynch; Editing by Richard Chang)