In a letter to Securities and Exchange Commission Chair Mary Jo White this week, Sen. Chuck Grassley (R-Iowa), chairman of the Senate Judiciary Committee, is demanding more information on fake filings that made their way onto the agency’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. At least two fake corporate takeover bids have used the agency’s public database to spread stock-price-affecting misinformation.

“This pattern of fraudulent conduct is troubling, especially in light of the relative ease in which a fake posting can be made,” Grassley wrote.

On May 14, at approximately 11:30 a.m., PTG Capital Partners, purportedly a London-based private equity firm, disclosed in a regulatory filing on the SEC’s EDGAR system that it offered to buy Avon for $18.75 a share. Neither the firm, nor the Texas based law firm listed on the filing, Trose & Cox, seem to exist.

Investors, who have pushed for Avon to sell, reacted to the “news” by boosting the company’s share price by a dollar over its opening at $6.71. In less than 30 minutes $91 million worth of Avon shares changed hands before trading was halted by the NYSE.

In 2012, another case of stock manipulation involved the fraudulent posting of a takeover bid on EDGAR. In that case, another apparently non-existent investment firm made a buyout proposal for the Rocky Mountain Chocolate Factory.

In his letter, Grassley asked for an accounting of how many fake documents have appeared in the database of publicly traded companies and what steps the SEC takes to verify the accuracy of filings.  “It is critical that the SEC also address the systemic vulnerability exposed by this incident,” he wrote.

The SEC’s initial response to the Avon situation, according to Grassley, was an observation that EDGAR functions merely as a repository for information and information should not be relied on as accurate. Given the high number of filings made on EDGAR, a detailed verification of each and every new filing would be cost-prohibitive.

He doesn’t accept that answer. “This pattern of fraudulent conduct is troubling, especially in light of the relative ease in which a fake posting can be made,” he wrote, calling for a review of the standards for posting on EDGAR.

Among the questions posed to White:

What, if any, efforts are made to verify any of the filings on EDGAR? What are the deadlines associated with these verifications?

How many instances of false postings to the EDGAR system have there been in the last three years? He asks the SEC to provide a list with information such as date of filing, type of filing and an explanation of the information in the filing that was determined to be false.

Has any attempt been made by the SEC to determine what the cost to investors and market participants was as a result of the false postings to EDGAR?

How many of the approximately 4,000 daily filings made on EDGAR are made by first time users of the system?

Has any attempt been made by the SEC to determine what the costs would be to verify the information on its most common filings? If there has, please provide the results of that effort. If not, why not?

What other steps has the SEC taken to address the systemic vulnerabilities exposed by this incident?

Grassley asked White to respond, in writing, by June 16.

 

 

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