On April 10, 2017, the Securities and Exchange Commission (”SEC”) announced fourteen enforcement actions, charging 28 businesses and individuals in connection with alleged schemes to pay writers to generate “bullish” articles relating to certain public companies, while concealing these promotion payments. See Press Release, SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, Rel. No. 2017-79 (Apr. 10, 2017), https://www.sec.gov/news/pressrelease/201779. Although the SEC did not allege that the articles contained any misstatements about the public companies, the SEC claimed that the failure to disclose the promotion payments violated the anti-fraud and anti-touting provisions of the federal securities laws, including Sections 17(a) and 17(b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Specifically, the SEC alleged that seven stock promotional and communications firms engaged in at least three separate and independent schemes to generate publicity for the stock of at least 21 different public companies. According to the SEC, after being retained to provide promotional services, the firms hired writers to draft articles touting the stock of public companies. These articles were then published as independent analyses on investment websites like SeekingAlpha.com, Benzinga.com, and SmallCapNetwork.com. The writers allegedly wrote articles under both their own bylines and under pseudonyms that were associated with false credentials; the latter included assumed academic degrees and accounting, fund management, or research work experience. One firm even allegedly required its writers to sign non-disclosure agreements that specifically prevented the writers from disclosing their compensation.
All told, the SEC alleged that over 450 articles were published in connection with the schemes. None of the articles disclosed that the authors had been paid by the companies about which they were writing, and at least 250 of the articles falsely stated that the authors had not been compensated at all. Section 17(b) of the Securities Act of 1933 is the anti-touting provision which prohibits publishing or circulating an article or communication for “a consideration received” without fully disclosing that consideration. In addition to bringing claims for anti-fraud and anti-touting violations, the SEC also charged one company with circulating promotional materials that did not comply with the prospectus requirements of the federal securities laws and one writer with scalping, i.e., recommending a stock to drive up the share price and then selling shares at the inflated price. The SEC states that the company violated Section 5(b)(1) of the Securities Act of 1993 because it generated articles and circulated promotional materials to potential investors that did not meet the requirements for final prospectuses, preliminary prospectuses, or free writing prospectuses.
The SEC brought claims against four public companies, two CEOs, seven stock promotion or communications firms, six employees at the firms, and nine writers. The SEC instituted settled administrative proceedings for 18 individuals and entities who, without admitting or denying the allegations, agreed to settle the claims in exchange for disgorgement and/or civil monetary penalties ranging from $2,200 to nearly $3 million. The SEC also filed complaints in the U.S. District Court for the Southern District of New York against 10 individuals and entities who did not agree to settlements, and those actions are pending.
On the same day that it announced the enforcement actions, the SEC also released an investor alert—warning that articles on investment research websites that appear to be unbiased may be part of an undisclosed paid stock promotion. SEC, Investment Alert: Beware of Stock Recommendations on Investment Research Websites, Apr. 10, 2017, https://investor.gov/additionalresources/newsalerts/alertsbulletins/investoralertbewarestockrecommendations. The alert bluntly advised investors that they should “[n]ever make an investment based solely on information published on an investment research website.”
The SEC’s recent action serves as a warning for investors conducting research online and sends a strong message to issuers and promotion firms about transparency to investors. The action also highlights the new challenges that cyber-related schemes present to regulators and investors, and how the digital age provides new outlets and mechanisms for actors to violate the securities laws. At the same time, the actions reflect that the SEC is focusing on this new reality, and extending its policing of the markets to the cybersphere, which the SEC will monitor vigorously going forward.
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