Oh, Rudy . . .

I’ve said it once already: If you used to be famous, you probably should steer well clear of conduct that could be construed as securities fraud. Because of the perceived deterrent value in highlighting your violations, regulators will have extra incentive to catch and make an example out of you. Daniel “Rudy” Ruettiger, a former Notre Dame football walk-on and the subject of the eponymous 1993 feelgood movie Rudy, learned as much today. The SEC charged him and 12 others in a scheme to deceive investors into buying stock in a company called Rudy Nutrition, which made a sports drink designed to compete with Gatorade. The drink was called, naturally, Rudy. The SEC claims investors were fed a number of false and misleading statements about the company. These included:

• a promotional mailer falsely claiming that in “a major southwest test, Rudy outsold Gatorade 2 to 1!” and  

• a promotional e-mail falsely boasting that in “several blind taste tests, Rudy outperformed Gatorade and Powerade by 2:1.”

Meanwhile, the scheme’s promoters engaged in manipulative trading to artificially inflate the price of Rudy Nutrition stock while selling unregistered shares to investors. My favorite part of this case is the quote from SEC Associate Director Scott Friestad: “Investors were lured into the scheme by Mr. Ruettiger’s well-known, feel-good story but found themselves in a situation that did not have a happy ending.” Also today, the SEC brought two huge cases against six former executives of Fannie Mae and Freddie Mac, alleging that they knew and approved of misleading statements claiming the companies had minimal holdings of high-risk mortgage loans, including subprime loans. Those cases will be much more important to the SEC’s mission in the long run, so perhaps more on those later.