The Securities and Exchange Commission has filed fraud charges against a Virginia-based mechanical engineer it accuses of scheming to manipulate the price of Fitbit stock with a phony regulatory filing.
According to the SEC’s May 18 complaint, Robert W. Murray purchased Fitbit call options minutes before a fake tender offer that he orchestrated was filed on the SEC’s EDGAR system. That filing purported to be a company named ABM Capital LTD that was acquiring Fitbit’s outstanding shares at a substantial premium. It was all a sham.
Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016. Murray sold all of his options for a profit of approximately $3,100.
The SEC alleges that Murray created an email account under the name of someone he found on the Internet, and the e-mail account was used to gain access to the EDGAR system. He then listed that person as the CFO of ABM Capital and used a business address associated with that person in the fake filing.
Murray also allegedly attempted to conceal his identity and actual location at the time of the filing after conducting research into prior SEC cases that highlighted the IP addresses the false filers used to submit forms on EDGAR. According to the Commission’s complaint, it appeared as though the system was being accessed from a different state by using an IP address registered to a company located in Napa, California.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Murray.
The SEC’s complaint charges Murray with violating antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14e-8.
The problem of “fake news” and fictitious filings is becoming a surprisingly common (albeit not yet rampant) problem for the SEC.
On April 10, the Commission when it announced enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes.
Investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks. These firms hired writers who, under the guise of impartiality, posted bullish articles about companies. In a notable twist, the rumor-spreading writers worked their way into well-known, mainstream financial news websites like Benzinga, Seeking Alpha, and Wall Street Cheat Sheet.
According to SEC complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors. One writer wrote under his own name as well as at least nine pseudonyms, including a persona who claimed to be “an analyst and fund manager with almost 20 years of investment experience.” Another stock promotion firm had writers sign non-disclosure agreements that prevented them from disclosing the compensation they received.
The SEC also alleged that some writers engaged in scalping—recommending a stock to drive up the stock price and then selling shares of the stock at inflated prices to generate profits.
Of those who settled charges brought against them, penalties ranged from approximately $2,200 to nearly $3 million, based on frequency and severity of their actions.
In November 2015, the SEC filed securities fraud charges against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies. He tweeted multiple false statements about the two companies on Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms.
The fake tweets caused one company’s share price to fall 28 percent before Nasdaq temporarily halted trading; another firm’s stock price suffered a 16 percent decline. On each occasion, the perpetrator bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings.
In June 2015, the Commission sued a Bulgarian trader, Nedko Nedev, behind fake tender offers that were posted to the Commission’s online EDGAR database. Nedev claimed, on behalf of private equity firm PTG Capital Partners, that PTG had offered to buy cosmetics giant Avon for $18.75 a share. In less than 30 minutes, $91 million worth of Avon shares changed hands before trading was halted by the NYSE. There was no such offer and the disclosure was fraudulent.
In 2012, another fraudulent takeover bid for the Rocky Mountain Chocolate Factory was announced on EDGAR. The SEC placed Nedev behind that scheme as well as a similar effort in 2014 to manipulate the stock price of insurance company Tower Group International with a fake press release announcing that it was the target of a takeover bid.
Other recent, but unrelated, EDGAR-based scams, have targeted Berkshire Hathaway, Phillips 66, and Alphabet/Google.
In August 2000, the SEC filed a complaint against a California man for perpetrating an Internet hoax that, in just 16 minutes, caused a Southern California high-tech company, Emulex, to lose $2.2 billion in market value.
The perpetrator was an employee of Internet Wire, a press release distribution company, and a student at El Camino Community College. Using the school’s computers, and purporting to act on Emulex's behalf, he issued a fake press release intended to manipulate the stock price and cover a short position.
The release disseminated fabricated claims that the SEC was investigating Emulex’s accounting practices, that its CEO had resigned, and that it would revise its earnings to report a loss instead of a profit.
The problem is also an international one.
French construction firm Vinci was the victim of a fake news release, sent to Bloomberg, announcing a financial restatement. The false report lead to the Autorité des Marchés Financiers investigating the case to determine how other companies can avoid similar woes.