Last week, the Securities and Exchange Commission alleged in a complaint that Encino attorney Howard E. Blumenthal helped manipulate the stock price in a former Valencia-based company called Hughes Capital and then tried to induce investors to buy stock in Hughes at artificially high prices.
Blumenthal was an attorney for Conserdyne, a company that Hughes had targeted for acquisition. The SEC alleges that he helped put out a fraudulent December, 1986, press release that misled prospective investors into thinking Conserdyne was about to get more than $200 million in business. But the SEC alleges that that never happened.
Blumenthal, 43, without admitting or denying the charges, signed an SEC consent agreement not to violate securities laws in the future.
Blumenthal declined to comment on the SEC action.
Hughes Capital has been in trouble with the SEC practically since the day it went public in August, 1986, when it raised more than $650,000 from investors. Hughes Capital was run as a so-called blind pool, using investors’ money to acquire and manage already existing companies.
Only 1 Acquisition
But Hughes’ only acquisition turned out to be Conserdyne, a now defunct Valencia solar-energy firm that Hughes Capital bought for $3.5 million in stock in January, 1987. Conserdyne lost $389,000 on sales of $784,000 for its fiscal year ended January, 1987. Five months later, Hughes closed Conserdyne’s operations.
The SEC complaint said the alleged scheme to drive up Hughes’ stock started when Blumenthal met with officials of the New York brokerage of Oppenheimer & Co., seeking $200 million in financing for Conserdyne.
Oppenheimer made a proposal, the SEC said, but it didn’t include $200 million in financing. Blumenthal rejected its offer and negotiations between the two parties were terminated. But that didn’t stop Hughes from subsequently issuing a press release that told a different story, according to the SEC complaint.
Hughes’ Dec. 22, 1986, statement, according to the SEC, “falsely stated that Hughes had a commitment in hand from a major Wall Street firm,” and “falsely stated that Conserdyne had received letters of interest representing more than $200 million in potential business.” And the SEC said the press release “falsely estimated the potential market for Conserdyne’s products in 1987 at $1 billion in Southern California alone.”
The SEC laid much of the blame for the press release on Blumenthal, who later became president of Hughes Capital. “Blumenthal had the best and, in some respects, the only first-hand knowledge of the failure of the negotiations with Oppenheimer,” according to the complaint.
Hughes’ press release apparently triggered interest in the company’s stock, which soared to a high of $15.50 per share in January, 1987. In February, 1987, the SEC suspended trading in the company’s stock for 10 days.
Things have gone downhill since then. Hughes’ stock no longer trades. The last available quote for Hughes stock was May 9 of this year and that was for 1 cent a share.
Hughes is no longer located in Valencia. The company’s Valencia phone number has been disconnected, and callers are referred to another number in the 213 area code. A receptionist answers the phone, “6343,” which are the last four digits of Hughes’ new telephone number.
In an interview last December, Blumenthal said he had been sent in to clean up Hughes Capital. “I was never party to any of the problems with this company. All of them happened without me being around,” Blumenthal said.
The troubles for Hughes Capital began in August, 1986, when it issued 90,000 units at $2 each. Each unit was good for one share of stock and 21 warrants that could be converted into another 21 shares of stock.
Last year, the SEC alleged that company insiders bought 80,000 of the 90,000 units in the names of friends and relatives to drive up the stock’s price. Some insiders made $5 million in paper profits before dumping the units on the open market, according to the SEC.
In July, 1987, the SEC charged John Knoblauch, Hughes Capital’s chief executive; Gilbert Beall, Hughes Capital’s director; and a Hughes Capital promoter, Lionel Reifler, of making false statements in the company’s stock offering, of manipulating its stock price and of planning acquisitions by Hughes Capital in companies in which the three had financial interests.
Blumenthal was Knoblauch’s and Conserdyne’s attorney when he was brought in to work for Hughes Capital in January, 1987. He worked as Hughes secretary-treasurer so the company could save on legal fees. Blumenthal said in December that Knoblauch and some other officers figured that “one of the significant things we’re going to be spending money on is lawyers. And so why don’t we just cut the budget a little bit. We’ll bring Mr. Blumenthal on board, give him a little piece of stock and we’ll have him run the legal aspect of it.”
Blumenthal said last December that “as it turned out, it probably was one of their better decisions.”
Blumenthal has run into problems before. In 1982, he was one of five people indicted by the U.S. attorney in San Diego on charges of securities fraud, conspiracy and mail fraud, for illegally diverting $6.5 million of $17 million that had been raised to finance Drywood Crop., a San Diego company developing a vacuum-wood drying process.
Blumenthal pleaded guilty to one misdemeanor count of fraud and was sentenced to three years of unsupervised probation. “It’s something I’m not terribly proud of, but it’s true,” Blumenthal said in December.
An SEC spokesman said an investigation into Hughes and its officers is continuing.