The Enforcement Division of the Securities and Exchange Commission has always been vigilant in attempting to police the Wild West of the stock promotion world — the supposed dark, underbelly of the financial markets. Historically, the SEC has prosecuted promoters for stock manipulation (pump and dumps), manipulative trading (wash sales, match trades and painting the tape), and, in particular, failing to disclose compensation received in exchange for touting a security.
The SEC’s legal basis for prosecuting promoters who publicize a stock but fail to disclose that they have been compensated for it, including the amount of such compensation, is found in Section 17(b) of the Securities Act of 1933 (the “Act”). This provision of the Federal Securities laws is designed to provide investors full disclosure as to the stock promoter’s financial incentives for recommending the stock in order to permit an informed investment decision.
The SEC has typically brought cases under Section 17(b) against stock promoters under two scenarios. The first is where the promoter fails completely to disclose the compensation received from the issuer of the security or its affiliate. The second scenario occurs where the promoter makes disclosures, but the SEC takes the position that they are insufficient and thus non-compliant.
As a former SEC Enforcement Attorney and now SEC defense lawyer, I have seen and defended many of these cases. But a recent SEC enforcement action caught my eye, if only for the new level of brazen achieved in connection with the alleged fraudulent stock promotion.
In SEC v. Contrarian Press, LLC, et. al., the Commission charged the Chief Executive Officer of Empowered Products, Inc., a sexual health products company, and a promoter, with conducting a fraudulent promotional campaign designed to tout Empowered Products stock. The SEC Complaint alleged violations of the anti-fraud provisions, as well as Section 17(b) of the Act.
In its Complaint, the SEC contends that the CEO of Empowered Products — who was also a substantial shareholder and ran an investment newsletter publisher on the side (Contrarian Press) — hired a stock promoter to secretly assist him in promoting the company through online newsletter articles purportedly written by independent authors. But, according to the SEC, the CEO and promoter actually authored and disseminated the bullish articles, working under such creative and catchy pseudonyms as “Charlie Buck”. (Nice touch). The stock promotions not only allegedly failed to disclose that Empowered Products and its CEO approved and paid for these online tout articles, but also made the affirmative, explicit representation that Contrarian Press did not receive any payments from Empowered Products for the marketing.
Talk about ratcheting up the brazen scale. I have seen many cases of non-disclosure of tout compensation, and several where the SEC has claimed the disclosure was insufficient and inadequate under 17(b) of the Act. But this is a first for me: an alleged representation that no money was paid for the promotion in an attempt to convince the investing public that the stock recommendation was beyond reproach. Clever … until the SEC apparently figured it out.
David Chase, a SEC defense lawyer and securities attorney, handles SEC investigations and FINRA inquiries nationwide, and is principal of the Law Firm of David R. Chase, a securities law firm, located in Fort Lauderdale, Florida. Mr. Chase also represents investors who are victims of stock fraud and stockbroker negligence in cases against securities brokerage firms.
For a confidential, no-cost consultation with Mr. Chase, call toll-free at: 800-760-0912, or send him an e-mail: firstname.lastname@example.org. The firm’s website is: www.securitiesfrauddefense.net.