The SEC is taking action against numerous companies for their false and misleading conduct related to COVID-19
Since February 2020, the U.S. Securities and Exchange Commission (SEC) has temporarily suspended trading in over 30 stocks and filed several enforcement actions against individuals and microcap securities issuers based on fraudulent COVID-19-related claims.
The enforcement actions have a common theme – fraudulent misrepresentations made in press releases and online forums about the company providing COVID-19 tests or protective equipment, in an attempt to unlawfully drive up the share price of the company’s stock.
These emergency enforcement actions seek to protect the public by freezing defendants’ assets, getting permanent injunctions to bar the wrongdoers from further violations of the securities laws, officer-and-director bars against individual participants, disgorgement of ill-gotten gains, civil money penalties, and penny stock trading bars.
SEC v. Nelson Gomes et al. (filed 06/09/20)
The SEC took emergency action against this group of individuals and offshore entities based on allegations of a fraudulent scheme to profit from the COVID-19 pandemic. The allegations include that the defendants generated more than $25 million from illegal microcap stock sales, using promotional campaigns that falsely asserted that the multiple companies involved could produce medical grade facemasks and automated retail kiosks. Company insiders dumped large amounts of the shares, hiding the activity so investors were unaware of the “pump and dump” scheme. The SEC warns that investors should generally be on the alert for fraud involving microcap stocks, as they may be more prone to manipulative schemes by fraudsters.
SEC v. Jason C. Nielsen (filed 06/09/20)
The SEC brought charges against a penny stock trader based in Santa Cruz, California, who allegedly engaged in a “pump-and-dump” scheme. The SEC claims that the trader made numerous false statements in an online investment forum about a biotechnology company, Arrayit Corporation, to artificially drive demand up, so the trader could sell his shares for a profit. The trader falsely asserted that the company had developed an approved COVID-19 blood test. The SEC also claims that the trader scheduled and subsequently cancelled several large purchases of the company’s stock as another way to create an apparent high demand for the stock. Investors should be attentive to signs of stock manipulation, especially those regarding products or services related to COVID-19.
SEC v. Applied BioSciences Corp. (filed 05/14/20)
The SEC filed a complaint against microcap company Applied BioSciences Corp. based on the company’s misleading press releases in March 2020, intended to exploit the coronavirus pandemic for profit. The company’s press releases claimed to offer shipment of at-home COVID-19 tests that could be used by individuals and institutions. The SEC complaint alleges that the tests were not approved for at-home use, had not been approved by the FDA, and, as of the press release, the company had not yet shipped any of the tests. The false and misleading press releases caused the company’s stock price and trading volume to soar.
SEC v. Turbo Global Partners, Inc. and Robert W. Singerman (filed 05/14/20)
The SEC filed a complaint against Turbo Global Partners, Inc. and its CEO and chairman, Robert W. Singerman, based on a “pump and dump” scheme to artificially increase stock value by issuing two false press releases in late March and early April 2020. The press releases announced the company’s involvement in a “multi-national-public-private-partnership” to distribute and sell non-contact fever-detecting equipment with facial recognition technology, which would soon be available in each state. The SEC alleges the releases were materially false and misleading in numerous ways, including that no such partnership existed, the equipment did not have such technology, and that the company’s CEO knew his statements to be false. The false and misleading press releases caused the company’s stock price and trading volume to all-time highs.
SEC v. Praxsyn Corporation and Frank J. Brady (filed 04/28/20)
In late April, the SEC charged Praxsyn Corporation and its CEO, Frank J. Brady, with issuing false statements regarding the company’s ability to source and distribute N95 masks. In a press release, Praxsyn claimed that it had established a supply chain that would allow the company to sell millions of masks. Subsequently, Praxsyn announced that it already had a large stock of masks. The SEC’s complaint alleges that Praxsyn neither had any masks on hand nor a single contract with a manufacturer or supplier. After being pressed by regulatory inquires, the company admitted in a third press release that it never had N95 masks on hand, and its artificially inflated share price and trading volume dropped to about what it had been prior to the false press releases.
The SEC Temporarily Suspended Trading in the Securities of the Following Companies for Violations Related to COVID-19
Using its authority under Section 12(k) of the Securities and Exchange Act of 1934, the SEC temporarily suspended trading due to concerns about the accuracy and adequacy of publicly available information and public statements made by these issuers:
- Blackhawk Growth Corp. (6/22/2020)
- Micron Waste Technologies Inc. (5/26/2020)
- WOD Retail Solutions Inc. (5/20/2020)
- Custom Protection Services, Inc. (5/5/2020)
- CNS Pharmaceuticals Inc. (5/1/2020)
- Moleculin Biotech, Inc. (5/1//2020)
- WPD Pharmaceuticals, Inc. (5/1/2020)
- Nano Magic Inc. (4/30/2020)
- Kleangas Energy Technologies, Inc. (4/27/2020)
- Decision Diagnostics Corp. (4/23/2020)
- Predictive Technology Group, Inc. (4/21/2020)
- SpectrumDNA, Inc. (4/21/2020)
- SCWorx Corp. (4/21/2020)
- PreCheck Health Services, Inc. (4/16/2020)
- Bravatek Solutions, Inc. (4/15/2020)
- BioXyTran, Inc. (4/15/2020)
- Signpath Pharma, Inc. (4/15/2020)
- Applied BioSciences Corp. (4/13/2020)
- Arrayit Corporation (4/13/2020)
- Solei Systems, Inc. (4/10/2020)
- Roadman Investments Corp. (4/10/2020)
- Parallax Health Sciences, Inc. (4/10/2020)
- Turbo Global Partners, Inc. (4/9/2020)
- BioELife Corp. f/k/a U.S. Lithium Corp. (4/9/2020)
- Key Capital Corporation (4/7/2020)
- Prestige Capital Corp. (4/7/2020)
- Wellness Matrix Group, Inc. (4/7/2020)
- Sandy Steele Unlimited, Inc. (4/3/2020)
- No Borders, Inc. (4/3/2020)
- Praxsyn Corporation (3/25/2020)
- Zoom Technologies, Inc. (3/25/2020)
- Eastgate Biotech (2/24/2020)
- Aethlon Medical, Inc. (2/27/2020)
Investing in Stock that was Previously Suspended by the SEC May Be Additionally Risky
The SEC suspends trading in a stock when it believes that suspension is required to protect investors and the public interest. Section 12(k) of the Securities and Exchange Act of 1934 allows the SEC suspend trading in any security (other than an exempted security) for a period not exceeding 10 business days. Even if trading resumes after the 10-day period, the SEC may continue to investigate a company to determine if it has defrauded investors. Importantly, the SEC is not required to alert the public of a pending investigation until an enforcement action is publicly filed, like the ones described above.
Stocks that trade on a national exchange automatically resume trading after the suspension period ends. However, securities traded on the OTC Markets, which typically are where many “penny stocks” or microcap stocks trade, do not automatically resume trading after the suspension period ends. Before trading can resume, certain requirements under SEC and FINRA rules must be fulfilled. This means that there is a risk the OTC stock never resumes trading. With no market to trade in, the stock may be worthless.
What Should You Do If You Discover a Trading Suspension?
The SEC recommends contacting the broker-dealer who sold you the stock, or who quoted the stock before the suspension. Ask if they intend to resume publishing a quote in the company’s stock. If trading resumes, expect a decline in the price of the security as investors may rush to sell of their holdings.
If a FINRA-registered broker-dealer recommended and sold you the stock, depending on the circumstances of the sale, your investment objectives and risk tolerance, and other factors, you may have a claim against the broker-dealer for your investment losses.
Investors should generally proceed carefully if trading in low-value microcap or “penny stocks.” Be wary of online forums or press releases that purport to announce a company’s COVID-19-related products or services.
Darlene Pasieczny is a fiduciary and securities litigator at Samuels Yoelin Kantor LLP. She represents clients in Oregon and Washington with matters regarding trust and estate disputes, financial elder abuse cases, and securities litigation. She also represents investors nationwide in FINRA arbitration to recover losses caused unlawful broker conduct. Her article, New Tools Help Financial Professionals Prevent Elder Abuse, was featured in the January 2019, Oregon State Bar Elder Law Newsletter.
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Oregon’s Court of Appeals recently made a step towards clarifying Oregon’s statute prohibiting financial abuse of “vulnerable persons” (which includes persons age 65 and older) under ORS 124.110. However, the broad contours of the elder abuse laws in ORS Chapter 124 remain far from certain.
