The Securities and Exchange Commission this week filed fraud charges against a second defendant in connection with a scheme to manipulate the price of Fitbit securities through false regulatory filings.
According to the SEC’s complaint, Mark Burns purchased Fitbit call options just minutes before he and his co-conspirator, Robert Murray, filed a fake tender offer on the SEC’s EDGAR system purporting to acquire Fitbit’s shares at a substantial premium. The SEC charged Murray last year, and he was recently sentenced to prison in a parallel criminal case.
The false tender offer was made in the name of ABM Capital, a nonexistent company for which the defendants created an EDGAR account.
Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Burns sold his options for a 350-percent profit of approximately $13,000.
The SEC’s complaint charges Burns with violating antifraud provisions of the federal securities laws. Murray agreed to settle the SEC’s charges against him. The settlement is subject to court approval.
The issue of “fake news” and fictitious filings is becoming a surprisingly common problem for the SEC.
On April 2017, the Commission 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.
The SEC 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.
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 also sued a Bulgarian trader, Nedko Nedev, for 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 similarly 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 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 led to the Autorité des Marchés Financiers investigating the case to determine how other companies can avoid similar woes.