Opinion ID: 4537743
Heading Depth: 2
Heading Rank: 1

Heading: The Adkinses and Their Investments

Text: with Donald & Co. In September 1997, the Adkinses began investing in securities with Otto Kozak, who was employed by E.C. Capital, Ltd. at the time. Adkins II, 140 Fed. Cl. at 300. The Adkinses continued to do so when Otto Kozak moved to GKN Securities Corp., and eventually, to Donald & Co. Securities, Inc. (“Donald & Co.”), a broker-dealer of securities registered with the Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers (“NASD”), in March 1999. Id. In late 1999, the Adkinses opened investment accounts at Donald & Co. Id. Unbeknownst to the Adkinses, Donald & Co. was operating a “pump-and-dump” scheme. 1 Id. at 300. Donald & Co. would arrange to purchase large blocks of stock in various companies and then encourage its clients to purchase those stocks. Id. This sudden rush to buy a significant number of stocks would inflate the price of that stock. Id. Donald & Co. would subsequently sell the stock that it owned at this inflated price, resulting in gains for the company. But when the stock price would eventually decline back to a normal level, the company’s customers would inevitably incur a loss because they had purchased those 1 A “pump-and-dump” scheme, as defined by the SEC, is “touting [] a company’s stock (typically small, socalled ‘microcap’ companies) through false and misleading statements to the marketplace.” Adkins II, 140 Fed. Cl. at 300 n. 4. Promoters of the stock may claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. Id. These promoters sell their shares after the stock price is “pumped” up by the sudden rush to purchase the stock. Id. Once promoters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money. Id. Case: 19-1356 Document: 37 Page: 5 Filed: 05/29/2020 ADKINS v. UNITED STATES 5 stocks at the inflated price. Id. While the Adkinses were investing with Donald & Co., the company pumped-anddumped at least five stocks: Elec Communications Corp. (“Elec”), The Classica Group, Inc. (“Classica”), MyTurn.com, Inc. (“MyTurn”), Great Train Store Co., and Tera Computer Co. Id. Many of Donald & Co.’s house stocks were owned via Odyssey Capital LLC, a holding company. Id. By February 2000, the value of the Adkinses’ investments with Donald & Co. was approximately $3.6 million. Id. at 301. At that time, the Adkinses’ portfolio included a number of stocks, with holdings in MyTurn stock representing the vast majority of the portfolio’s value. Id. at 301–02. It was during this month that the value of the MyTurn stock began to decline. Id. at 302. The Adkinses’ MyTurn stock, which was valued at $2,936,250 in February 2000, had fallen to $1,029,420 by April 2000. Id. As a result, the equity in the Adkinses’ margin account fell below the required threshold and Donald & Co. began to issue margin calls. 2 Id. To meet these margin calls, Mr. Adkins instructed Otto Kozak to sell some of the Adkinses’ stock holdings, particularly the MyTurn stock. Id. But Kozak did not follow this instruction. Instead, he convinced Mr. Adkins to retain the MyTurn stock and to meet the margin calls by transferring additional cash ($1,074,181.11) and securities (valued at $1,261,082.37) to Donald & Co. Id. To meet Donald & Co.’s margin calls, the Adkinses transferred certain securities 2 If a person buys on margin and the value of his se- curities declines, his brokerage firm can require him to deposit cash or securities to his account immediately, or sell any of the securities in his account to cover any shortfall. Adkins II, 140 Fed. Cl. at 302 n.12 (quoting SEC, Margin Call, https://www.investor.gov/glossary/glossary_terms/ margin-call (last visited May 28, 2020)). Case: 19-1356 Document: 37 Page: 6 Filed: 05/29/2020 6 ADKINS v. UNITED STATES that they purchased through other firms, including Bear Stearns, May Davis Group Inc., and H.J. Meyers & Co., Inc. (collectively, “third-party brokers”). Through these thirdparty brokers, the Adkinses had purchased MyTurn stock in the amount of $143,617.72; Tera Computer Co. stock in the amount of $26,793.13; and Great Train Store Co. stock in the amount of $40,890.00. Id. All of the Adkinses’ purchases of MyTurn stock through these third-party brokers were made at Otto Kozak’s urging. Id. By the beginning of 2002, the value of the Adkinses’ investments with Donald & Co. had fallen below $10,000. Id. (reflecting a value of $9,848.62 at the end of December 2001). Id. On July 24, 2002, Donald & Co. ceased operations due to insufficient capital. Id. at 304. Donald & Co. was expelled from the NASD on March 18, 2003. Id. As noted below, moreover, indictments relating to this fraudulent scheme soon followed.