Billionaires Charged in $27 Million Alleged Scheme

By Lynn Mckeel, Fall 2018 IAC Student Intern

Nothing caps off a Friday like a family friendly fraud bust. Last month, the SEC announced they have charged ten individuals and ten associated entities of being involved in an elaborate and highly profitable “pump and dump” scheme. The fifty-three page Complaint, filed in the Southern District Court of New York, alleges the individuals (including gold tycoon Barry Honig and pharmaceutical billionaire Phillip Frost) “agreed to buy, hold or sell their shares in coordination with one another.”  (See SEC Complaint filed on September 7, 2018). According to the Complaint, the fraudsters allegedly “orchestrated transactions designed to create market” interest in the company. Check out the Complaint for a complete list of the dozens of alleged securities violations.

The SEC often investigates possible violations of securities laws. The investigations are conducted privately, and include market review, investor tips and complaints, media reports, and collaboration with self-regulatory organizations such as FINRA. By collecting tips, interviewing witnesses, examining brokerage reports, and reviewing trading data, the SEC works tirelessly to protect the market and investors. If the SEC determines a substantial securities law violation has taken place, or continues to take place, the SEC will file a civil complaint in the U.S. District Court.

The fraud alleged today is known as a “Pump and Dump” or market manipulation. Essentially, the fraudsters will hype up and inflate the value of an investment and sell (or “dump”) their shares of the holding, resulting in a large pay day for the fraudster and worthless investments for the victims. According to FINRA fraudsters usually purchase “penny stocks” in small or unknown companies and bombard society with false rumors, fake promotions, and elaborate media content. As the rumors grow and investors start purchasing stock, the price of the stock grows. When the price of the stock increases, investors believe they’ve made a sound and lucrative investment decision. Unfortunately, the investors are simply purchasing overpriced and overvalued stock from the fraudsters. The fraudsters turn a huge profit, while the investors are left nothing.

Do you know how to avoid pump and dumps? Before you invest always do your research. FINRA is an excellent source of information and investment safeguards. We may all be familiar with the some of the basic tips such as researching the source of information, checking SEC filings, and following the stock exchange, but have you considered the importance of “reverse merger” activity? According to FINRA, many pump and dump schemes center around a reverse merge. A reverse merger usually involves private companies from outside the US merging with an existing US public shell company. Usually these mergers are on the up and up, however if your investment exists because of an reverse merger, be sure the company is upfront and forthcoming with information regarding the risks of associated with these types of mergers.

If you believe you’ve been a victim of a pump and dump scheme, please file a complaint with the SEC.