SEC Takes Action: False & Misleading Conduct Related to COVID-19

Investment

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, AttorneyDarlene 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.

Investor Alert – Fraudsters Target CARES Act Retirement Savings Relief

If you are considering using provisions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to withdraw and reinvest money from your retirement savings, be aware that fraudsters may be targeting you. Be wary when someone encourages you to use your retirement savings to make new investments. When considering new investments, do your own research and consider contacting an unbiased investment professional or an attorney.

CARES Act Retirement Savings Benefits

The CARES Act includes provisions designed to provide relief for individuals who are financially impacted by the COVID-19 pandemic. Among these provisions are relief efforts that allow individuals to pay back amounts withdrawn from qualified retirement plans without paying income tax on the withdrawal. The CARES Act also allows individuals to take out larger retirement plan loans with limited income tax consequences. For those suffering financial hardship, the CARES Act benefits can provide much-needed liquidity. Unfortunately, fraudsters and dishonest promoters are using this crisis to encourage investors to make high risk or high fee investments that may not be in the investor’s best interest.

How Fraudsters Are Targeting Retirement Savings

Promoters or investment professionals may contact you with a recommendation that you take advantage of the CARES Act benefits to withdraw money from your retirement savings and invest that money. If you have been contacted with such a recommendation, be very wary. The individual who contacted you may be part of a predatory scheme to profit off your retirement savings. Always be sure to verify that the person you are speaking with is licensed to give advice or sell investments. Contact your state securities regulator or use these free tools from the SEC and FINRA to verify the license and history of an investment professional.

Important Considerations for Using Your Retirement Accounts to Make New Investments

There are several important drawbacks you should consider before you use retirement funds to make new investments. The promoter may charge you high fees. Inquire how much of your money will be invested for you and how much will go to the person managing the investment. Liquidity – whether you can easily cash out of the investment – can be very important in today’s uncertain environment. Make sure to ask whether there are any fees for early withdrawal or sale. Consider the current value of your retirement investments. If the market is down when you withdraw retirement savings, you may not recover those losses when the market rebounds. If you invest the money that you take out as a loan from your retirement savings, you may have difficulty repaying the loan if the investment performs poorly.

Darlene Pasieczny, AttorneyDarlene 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.

Featured image courtesy of SYK paralegal Torrie Timbrook.

Victims of COVID-19 Scams & Cybercrime Need to Act Fast

Victims of COVID-19 Scams and Cybercrime Need to Act Fast – FBI’s Financial Fraud Kill Chain May Recover Fraudulent Wire Transfers

Cybercrime is becoming ever more pervasive, and with so many more people working at home during the COVID-19 coronavirus pandemic, the risk of a fraudulent wire transfer and other financially motivated crimes is higher than ever.

Fraudsters use crisis events to target good-hearted investors.

The SEC and other federal and state regulatory agencies are paying close attention to COVID-19-related financial fraud, such as fraudulent stock promotions and unregistered offerings, charitable investment scams, and community-based financial frauds. Since February 2020, the SEC has suspended stock trading in connection with COVID-19 for at least 23 companies, and has initiated at least five emergency enforcement actions against companies seeking to exploit investors with false and misleading promises. These investment scams include fraudulent claims of N95 mask production, and manufacturing COVID-19 blood tests and thermal scanners for fever detection.

The FBI’s Financial Fraud Kill Chain:  A Resource for Recovering Stolen Funds

Unfortunately, while regulatory agencies work hard to shut down fraudulent scams, it can be difficult to impossible to recover money from the fraudsters.  Especially if the investor funds or cybercrime victim’s bank account funds have been transferred overseas. The Financial Fraud Kill Chain (FFKC), a program administered by the FBI, is a critically important tool that can cut off large international wire transfers. But victims need to act fast, within 72 hours of the wire transfer.

How does the Kill Chain work?

Financial fraud scams are often international, with unsuspecting investor money transferred from the United States to overseas financial institutions via international wire transfers through the SWIFT system. Cybercriminals hacking email accounts may use personal information to prey on individuals (“I’m traveling overseas and need money for a plane ticket home”). Businesses are also targets of cybercriminals. For example, corporate account takeovers and business e-mail compromise scams may be used to redirect legitimate wire transfers to fraudulent overseas accounts.

The Kill Chain utilizes the FBI’s international relationships to help U.S. financial institutions recover large international wire transfers. If the Kill Chain is activated, the FBI can prevent the withdrawal of stolen funds by cutting off the SWIFT transfer.

What kind of transfer qualifies to initiate the Kill Chain?

The FFKC can only be activated if:

  • The wire transfer is $50,000 or more;
  • The wire transfer is international;
  • A SWIFT recall notice has been initiated; and
  • The wire transfer occurred within the last 72 hours.

To initiate the FFKC process, you should immediately contact your local FBI field office and also notify your financial institution that originated the transfer. Because time is of the essence, call your local FBI office and fill out an on-line complaint through the FBI’s Internet Crime Complaint Center (IC3).

Providing the FBI with more information will allow the agency to respond more effectively, but all complaints should include the following:

  • Victim business name and address,
  • Transaction type, amount, and date,
  • Originating bank name and address,
  • Beneficiary bank name and address,
  • Beneficiary account number,
  • Beneficiary bank location (if known), and
  • Intermediary bank name (if known).

If you or your business has been the victim of wire transfer fraud, consider still reporting it to the FBI even if the fraud does not meet the above criteria to initiate the Kill Chain.

And as we all work to protect ourselves and each other during the coronavirus pandemic, COVID-19-related investments scams should be reported to the SEC and your state’s securities regulator

Darlene Pasieczny, AttorneyDarlene 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.

Cruze: Elder Case

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.

In Cruze v. Hudler, 246 Or App 649 (November 23, 2011), the court addressed various fraud claims alleged against Markley in an investment scheme. While not discussed in depth by the court, one of these claims was for financial abuse of an elderly person under ORS 124.110(1)(a) where an action may be brought under for financial abuse in the following circumstances:

When a person wrongfully takes or appropriates money or property of a vulnerable person, without regard to whether the person taking or appropriating the money or property has a fiduciary relationship with the vulnerable person.

Cruze, 246 Or App at 649. The court referred to another Oregon case, Church v. Woods, 190 Or App 112 (2003), and paraphrased it to mean that “conduct is ‘wrongful’ under ORS 124.110 if it is carried out by improper means, including deceit and misrepresentation.” Id.

This phrase “wrongfully takes or appropriates” is a slippery one. In Cruze, the alleged abuse was wrongful taking through fraudulent misrepresentation – a tort claim that requires showing, among other things, that the party subjectively intended to deceive the victim.These cases suggest that, at least for the purposes of ORS 124.110(1)(a), a person who mistakenly but incorrectly takes money or property from an elderly person in an otherwise lawful context should not create elder abuse liability.  But as with many legal issues, guarantees are tough to come by.