By: Alexandra Hughes, Spring 2016 Clinic GRA
The SEC’s Office of Investor Education and Advocacy recently released an updated Investor Alert on Fraudulent Stock Promotions “to warn investors about fraudsters who promote a stock to drive up the stock price and then sell their own shares at the inflated price, making money at investors’ expense.” These stock promoters are generally paid promoters or company insiders. If stock promoters don’t disclose the compensation they receive from promoting a stock, the SEC will bring charges. However, disclosure of compensation does not necessarily mean that the promotion is legitimate.
Fraudulent stock promotion was recently discussed in a SEC press release. In March 2016, the SEC settled charges against Tobin Smith, a former market analyst and TV news commentator, and NBT Group Inc., for fraudulent promotion of a penny stock to investors. Smith and NBT were barred from involvement in future penny stock offerings and disgorged compensation from the penny stock promotion in the amount of $165,900 plus $16,893 in interest. Smith was also required to pay a $75,000 penalty to settle the charges.
The SEC warns investors that promotion of stock by fraudsters can occur on “seemingly independent and unbiased sources” like:
- Social Media: For more information, investors should reference Updated Investment Alert: Social Media and Investing—Stock Rumors.
- Investment Newsletters: For more information, investors should reference Investor Alert: Investment Newsletters Used as Tools for Fraud.
- Online Advertisements
- Email: For more information, investors should reference Investor Alert: Don’t Trade on Pump-And-Dump Stock Emails.
- Internet Chat Rooms
- Direct Mail
The SEC advises that the most susceptible stock prices to manipulate, and thus the easiest targets for fraudsters interested in stock promotion, are those of microcap stocks and penny stocks. For microcap stocks, the dangers of fraud are further increased because publicly available information about these stocks is scarce and false information about them can be easily spread. Warning signs of microcap fraud may include:
- SEC trading suspension of the security or of other securities also promoted by the promoter
- Increases in the stock price or trading volume
- Press releases or promotion activity about events (that actually never occur)
- No real business operations
- Issuance of shares without a corresponding increase in company assets
- Changes in company name or business type