SEC targets 27 firms for fraudulently promoting stocks

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If it’s published on the internet, it must be true, right? That’s what 27 individuals and companies charged with fraudulently promoting stocks hoped, says the Securities and Exchange Commission (SEC) in a recent enforcement action.

According to the SEC, the players charged were involved in various alleged stock-promotion schemes designed to lead investors to believe they were reading independent, unbiased analyses on investing websites while the writers secretly received compensation for touting company stocks.

The SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks. The firms subsequently hired writers to publish articles promoting those stocks. However, nowhere were the companies’ payments for “news they could use” disclosed. According to the complaints, under the guise of impartiality, the writers hired allegedly posted bullish articles about the client companies on the web, when in reality the posts were paid advertisements.  Moreover, more than 250 of the articles specifically included false statements that the writers had not been compensated by the companies they were writing about.

Disclosure matters

Advertising and/or publishing “advertorials,” which are clearly promotional is different than independent research, analysis, or journalism. Key is that the reader/viewer/listener understands that the promotional materials are, in fact, promotional. “These companies, promoters, and writers,” says Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement, “allegedly misled investors by disguising paid promotions as objective and independent analyses.”

According to the SEC’s orders, and a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors.  One writer, for example, wrote under his own name as well as at least nine other pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.”

One of the stock promoting firms even went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing the compensation they received.

“Deception takes many forms,” says Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement. “Our markets cannot operate fairly when there are deliberate efforts to reach prospective investors with positive articles about a stock while hiding that the companies paid for those articles,”

The SEC filed fraud charges against three public companies and seven stock promotion or communications firms as well as two company CEOs, six individuals at the firms, and nine writers.  Of those charged, 17 have agreed to settlements that include disgorgement or penalties ranging from approximately $2,200 to nearly $3 million based on frequency and severity of their actions.  The SEC’s litigation continues against 10 others.

Separately, the SEC also instituted separate charges against another company for its involvement in circulating promotional materials that did not comply with prospectus requirements under the federal securities laws. That company settled the case. The SEC also released an investor alert warning that articles on an investment research website that appear to be an unbiased source of information or provide commentary on multiple stocks may be part of an undisclosed paid stock promotion.

As a result of these actions, Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy warns prospective investors that “stock promotion schemes may be conducted through investment research websites. Investors looking for objective investment information should be aware that fraudsters may use these websites to profit at investors’ expense.”

The SEC “editorial” perp walk

Among those identified in this sweep are:

Galena Biopharma, Inc. — From January 2012 to February 2014, Galena and its then-CEO Mark Ahn engaged in a scheme to mislead investors by commissioning over 100 internet publications promoting Galena. As CEO, Ahn, on behalf of Galena, engaged two firms, Lidingo Holdings and the DreamTeam Group, (both mentioned later in this blog) to pay writers to chat up Galena on investment websites through articles and/or postings. On more than 40 occasions, the writers failed to mention any compensation other than what they received the websites for whom they wrote. Trickier still is that some of the Galena-funded articles and postings also constituted unlawful prospectuses transmitted while Galena was preparing to offer securities — improper “gun-jumping” and a violation of federal securities laws’ antitrust fraud/touting provisions. Other violations included reporting and securities registration violations when Galena “sold” securities to Lidingo (one of its promoters) as part of its compensation. Both Galena and Ahn have settled.

ImmunoCellular Therapeutics, Ltd.

ImmunoCellular Therapeutics (IMUC)is a Delaware corporation headquartered in Calabasas, CA. From September 2011 to August 2012, IMUC, through its former CEO Manish Singh, commissioned more than 60 internet articles promoting the company on investment websites. Singh engaged Lidingo Holdings (sound familiar?), to pay the writers. He also directed Lidingo to use writers who would not disclose their source of compensation. IMUC settled with the SEC.

Lion Biotechnologies, Inc.

Manish Singh also was named, as former a CEO, in the SEC’s action against Lion Biotechnologies. From September 2013 to March 2014, Lion, through Singh, commissioned more than 10 internet publications and 20 widely-distributed emails promoting Lion to potential investors. Singh again hired Lidingo to hire the right writers. In addition, Lidingo also published one article commissioned by Singh after Lion filed a registration, but before that registration became effective. The article did not comply with federal securities laws relating to prospectuses. Lion also settled.

Manish Singh (again) and Lavos, LLC

From August 2011 to March 2014, Singh engaged in a paid stock-touting scheme involving 12 issuers, at least 10 writers and more than 400 internet publications, and the distribution of emails to thousands of potential investors. During this time, Singh, who used his own firm Lavos to execute most of the promotional activity, was also the CEO of the two publicly-traded companies, ImmunoCellular Therapeutics, Ltd. and Lion Biotechnologies, Inc.  As mentioned previously, Singh worked closely with Lidingo. The scheme was very lucrative for Singh, who received at least $1.75 million in cash and equity. Singh and Lavos settled with the SEC.

Lidingo Holdings

For nearly two-and-a-half years, stock promotion firm Lidingo Holdings LLC paid writers to generate hundreds of bullish articles about public company clients while concealing from investors that these were paid promotions. Not one of the articles disclosed, as required by law, that the writer was being paid indirectly by the company they were writing about, and in fact, many falsely claimed that the writer had not been compensated. Named in the complaint are members of Lidingo management and the writers.

CSIR Group, LLC

For approximately one year, stock promotion firm CSIR Group, LLC paid writers to generate bullish articles about its public company clients while concealing from investors that these were paid promotions. Named in the complaint are members of CSIR’s management and the writers.

Michael McCarthy’s The DreamTeam Group, LLC, Mission Investor Relations, LLC, and QualityStocks LLC

From August 2012 to February 2014, Michael McCarthy, through three entities he owned and controled, The DreamTeam Group, LLC, Mission Investor Relations, LLC, and QualityStocks LLC, paid writers for 39 internet articles promoting the securities of some of their publicly-traded clients. McCarthy and DreamTeam also directly published more than 20 blog posts that linked to and summarized the articles they had commissioned, which suggested that there was organic interest in the companies discussed.

Edward Borelli and Dunedin, Inc.

From December 2012 to October 2013, Edward Borrelli, through his investor relations firm Dunedin, Inc., paid writers (some of whom settled separately) for 21 internet publications promoting the securities of Dunedin’s publicly-traded clients. The publications purported to be independent when, in fact, they were promotions indirectly funded by Dunedin’s clients.

Expensive “journalistic” missteps

In this saga recording a repeating series of unfortunate events, “like attracted like” and bad actors found each other, joined forces and got caught. The rest of their stories are about fines, exposure and worse.

Compliance, implementing the policies and procedures to nip these exposures in the bud, is so much cheaper. Given that management, supervisors, and every compliance professional is responsible for tracking valid (and invalid) communication in this increasingly digital world, be smart. Follow your members, follow your marketing, and above all, have the right written supervisory policies procedures in place.

Stuff happens. And when it does, make sure you have the tools to ensure regulatory compliance, reduce your firm’s reputational exposure, and avoid related financial consequences. Even if your compliance function is under pressure to do more with less, you do have options?

Let’s talk (212-233-1155) about Patrina’s comprehensive compliance solutions, compliant data capture + storage, and compliant recordkeeping specifically designed for the financial services community.

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