Monday, November 17, 2014

Section 17B hit

The SEC just charged three penny stock promoters  behind pump-and-dump Schemes.
The allegations included Section 17B violations:

According to the SEC’s complaint filed in federal court in Manhattan, the newsletters published by Thompson, Fung, and Van Nguyen misleadingly stated that they “may” or “might” sell shares they owned when in reality their intentions always were to sell the stocks they were promoting.  In fact, in some instances they already were selling the stocks to which they were saying “may” or “might” sell.  They also failed to fully disclose in their newsletters the amounts of compensation they were receiving for promoting the stocks, cloaking the fact that they were coordinating their promotion of the penny stocks to deliberately increase the prices and dump their own shares.


It is important to note that saying you might sell the stock you owned is not enough when you always intended to sell and it is not enough when you are actually selling. 

The SEC also alleges that these folks failed to FULLY disclose compensation for promotion, cloaking the fact that they were coordinating in the promotion to deliberately increase the price and dump their own shares.

Saturday, August 30, 2014

Author Profile

Author Profile: John E. Lux, Esq.__________________________________________

I am a securities lawyer with years of experience working on Wall Street. I have worked as an investment banker and market maker. I advise fast growing companies on how to raise funds, go public with an Initial Public Offering or Reverse Merger, optimize trading in their stock, and fight off short sellers and other bad guys. My goal is to have my clients experience a “Rocket Ride” 0f growth.

John E. Lux, Esq.
1629 K Street, Suite 300
Washington DC 20006
Telephone (240) 200-4529



  • To avoid violating Section 17(b), give the exact specific source of any compensation
  • Give the exact amount of compensation – past, present or promised in the future
  • and give the type of consideration (e.g. stock, cash, or combination of cash and stock)
  • Do not say you are independent if you are not
  • When you are given stock, use reasonable inquiry to make sure that it is not actually restricted
  • Beware of stock from affiliates of the company and their associates
  • Stay away from fraudulent promotions
  • Do not trade if you have inside information
  • Do not engage in scalping
  • Do not sell stock at far less than the target price you are giving

  • It is legal:
    • for investor relations firms to be paid for recommendations,
    • for investor relations firms to be paid in free trading stock,
    • for investor relations firms to be paid by third parties,
    if Section 17(b) is complied with.

Possible Accompanying Charges

Possible Accompanying Charges

Investor relations firm that are charged with violating Section 17(b) are sometimes hit with other charges as well.

Section 17(b) violators are often also charged with fraud violations under Section 17(a) of the Securities Act of 1933 and Rule 10b-5 of the Securities and Exchange Act of 1934. Section 17(a) is an anti-fraud provision as is 10b-5.

Naturally, if people are doing wrongful promotion and not abiding by 17(b), they are probably making false statements in the content of the promotion as well.

It is important to note that stock promotion companies have also been charged with insider trading for selling stock based on negative insider information not available in the market.

In the case of SEC v., Inc. et al, the SEC charged IP Equity with violating 17(b) and insider trading. By virtue of its agreement with to provide publicity services, IP Equity, its officers, and its employees obtained material non-public information about, including but not limited to information about the company’s true financial condition, its customers, and its private offerings, as well as about the undisclosed securities transactions of its officers and directors. IP Equity, its officers, and its employees owed a duty of trust and confidence to to refrain from using for personal gain any confidential information they obtained by virtue of their work for

On or about December 10, 1999, IP Equity initiated a campaign to generate positive publicity for IP Equity’s Internet Stock News, which purported to be “the Web’s leading source for information about Internet investment opportunities,” published what it claimed to be “an investment opinion to notify analysts, brokers, market makers, institutional and retail investors, as well media representatives that IP Telephony company, Inc. has started trading . . . under the symbol ‘PKPT’.” Internet Stock News falsely stated that its press release contained “independent commentary about Internet stocks.”

On December 13, 1999, IP Equity’s Internet Stock News issued a recommendation for IP Equity stated that it had added to its “Ones to Watch in 1999 group of Internet companies.” IP Equity claimed that was “now fully restructured, debt-free, and poised to capitalize on the IP-based solutions market.” IP Equity claimed that its “Ones to Watch” group of companies was “up 200% year-to-date and, to [its] knowledge, . . . beat every single money management and mutual fund company in existence.” IP Equity also falsely and misleadingly claimed that its announcement contained “independent commentary about Internet stocks” and that it held “up to four hundred thousand shares of mPhase and Inc.” On this same date, the transfer agent had delivered IP Equity’s 1.2 million restricted Linkon shares reissued as 400,000 shares in an unlegended stock certificate.

IP Equity’s statement that was debt-free was false and misleading. In fact, remained liable for at least $802,500 in judgment debt. IP Equity’s statement in its recommendation that it held “up to” 400,000 shares of mPhase and was false and misleading. At the time, defendant IP Equity actually owned 400,000 recently-acquired shares and beneficially owned another 1,000,000 shares through its option to acquire 1,000,000 shares at a privately offered price.

On December 21, 1999, defendant IP Equity exercised its private offering option and purchased 1,000,000 shares at $0.13 per share. After buying shares at $0.13 per share, IP Equity continued to recommend to public investors on its Internet website and in subsequent press releases and continued to sell shares to the public at an average price of about $9.58. About half of IP Equity’s total sales to the public occurred after it exercised this option. IP Equity did not disclose to the public the private offering of shares at $0.13 per share, its purchases of at $0.13 per share, or its essentially contemporaneous sales of shares to the public at prices averaging $9.58 per share.

IP Equity’s officers caused IP Equity to sell shares and benefited from the sales proceeds. While IP Equity sold shares in December 1999 and at times thereafter, IP Equity's officers were in possession of material nonpublic information about the company, including but not limited to: the true financial condition of the company; the private offering price of shares; the paid-for publicity arrangement between itself and the company; and the scheme of the defendants to pump up the market price and sell their shares.

Restricted Stock

Restricted Stock_________________________________________________________
In cases involving the most ruthless stock manipulators, very often these miscreants obtain fraudulent opinions under SEC Rule 144 to improperly remove restrictions from lettered securities.
For example, in the case of SEC v. Recycle Tech, et al, the attorney did little or no due diligence into the company whose stock was the subject of his opinion and ignored the several “red flags.” The attorney had information that should have told him that the company was a shell company ineligible to use Rule 144. He miscalculated the holding period. The company was delinquent on its required filings and thus the current information requirements of Rule 144 were not satisfied. The opinion relied on falsified or backdated documents and this would have been revealed by simple due diligence. The issuance relied on an old resolution and no attempt was made so see if it was still in effect. The shares to be freed up from the debt conversion would double the outstanding stock. The attorney should have known that one of the sellers was an affiliate of the company and yet he did not in his opinion letter apply the restrictions on manner of sale, amount that could be sold, and notice of sale.
The newsletters touting the stock offered only general disclaimers and did not report that they were selling into their buy recommendation.
Moreover, the newsletter only contained a general disclaimer. The newsletter disclosed:

[w]hen receives free trading shares as compensation for a profiled company, may sell part or all of any such shares during the period in which is performing such services.”

It then specifically disclosed that it “has received from a third party non-affiliate 2.325 million free trading shares of [Recycle Tech] for advertising and marketing.”

The SEC charged that the newsletter did not, however, disclose the third party’s identity or the stock sales of Pennypic's principal.

Thus, we see here that the SEC found this disclaimer was inadequate even though it disclosed that the newsletter “may” sell, and that the stock was from a third party and the number of shares.

One violation that we note in some of these cases is that the promoters, who are themselves control persons, buy restricted stock, and in order to assist in the making the stock unrestricted, place the securities not in their names, but in the names of others who are not control persons. From there, the securities can be handed out for stock promotion or simply sold with most of the proceeds of sale remitted to the promoter.

We would advise investor relations firms who are receiving stock as consideration for their promotion to be on the alert for several violations of their clients that may ensnare the investor relations professional as well.

First, be on the alert for being given stock without a restriction that is actually restricted stock. If the client or promoter is giving you stock, make sure it is lawful.

Second, an affiliate or control person of the company may be giving you stock that was just cleared of a restriction. Be advised that the affiliate or control person has restrictions on how he can sell the stock that do not include handing it off to you. The actual sales restrictions for persons affiliated with the issuer, control persons, are limited to free market sales with volume restrictions. If you accept stock knowing or even suspecting that there are irregularities, you may be asking for trouble.

Third, if you knew or should have known that there were improprieties in the removal of the restriction or any other matter that would make the transfer of the stock to you improper, you may be roped in to a case you do not want to be in. As my father used to say, “when the police wagon comes up to the house of ill repute, they take the good girls with the bad.“ Do a little investigation to protect yourself.

Failed Defenses

Failed Defenses_________________________________________________________
Some defendants claimed that they were using the "industry-standard" disclaimer and that if all the broker-dealers were using that, it that must be accepted by the industry even though the rule says you have to put the specific amount of compensation in the claimer. This does not work, as the courts and the Commission have repeatedly held a practice may be prevalent in the industry and still be fraudulent.
Further, note that in order to show a 17(b) violation, the SEC need not show that anyone read the communication, need not show that anyone relied on the communication, and need not show that the communication was in any other way false, other than as to the compensation received.
In fact, 17(b) requires only a “description” of a security, not even a recommendation.

Sales of Private Securities

Sales of Private Company Securities________________________________________
In an SEC complaint against The Investors Registry, LLC (TIR) and Michael J. Southworth, the SEC alleged that Southworth oversaw the sale of at least 650 memberships in TIR which he marketed as an exclusive investment community where members would be provided with opportunities to invest in pre-IPO companies. He represented that TIR researched thousands of early-stage companies and culled them down to only a handful of promising issuers that TIR profiled as investment opportunities.
From 2007 to 2011 Southworth touted five issuers by e-mail and by posting offering and subscription materials on TIR's website. He also helped structure terms of the offerings. He was not registered as a broker-dealer but contracted for and received cash and stock from issuers in exchange for acting as a broker in recommending and selling their securities and he failed to fully inadequately disclose this consideration the TIR memberships. Thus, here we have a case that involves the private sales of securities and not securities trading in the public market.