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. Packetport.com, Inc. et al,
the SEC charged IP Equity with violating 17(b) and insider trading.
By virtue of its agreement with PacketPort.com to provide publicity
services, IP Equity, its officers, and its
employees obtained material non-public information about
PacketPort.com, 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 PacketPort.com to
refrain from using for personal gain any confidential information
they obtained by virtue of their work for PacketPort.com.
On
or about December 10, 1999, IP Equity initiated a campaign to
generate positive publicity for PacketPort.com.
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 PacketPort.com, 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 PacketPort.com. IP Equity stated that it had added
PacketPort.com to its “Ones to Watch in 1999 group of Internet
companies.” IP Equity claimed that PacketPort.com 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 PacketPort.com Inc.” On this same
date, the transfer agent had delivered IP Equity’s 1.2 million
restricted Linkon shares reissued as 400,000 PacketPort.com shares in
an unlegended stock certificate.
IP
Equity’s statement that PacketPort.com was debt-free was false and
misleading. In fact, PacketPort.com 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 PacketPort.com was
false and misleading. At the time, defendant IP Equity actually owned
400,000 recently-acquired PacketPort.com shares and beneficially
owned another 1,000,000 shares through its option to acquire
1,000,000 PacketPort.com shares at a privately offered price.
On
December 21, 1999, defendant IP Equity exercised its private offering
option and purchased 1,000,000 PacketPort.com shares at $0.13 per
share. After buying PacketPort.com shares at $0.13 per share, IP
Equity continued to recommend PacketPort.com to public investors on
its Internet website and in subsequent press releases and continued
to sell PacketPort.com 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 PacketPort.com shares at $0.13
per share, its purchases of PacketPort.com at $0.13 per share, or its
essentially contemporaneous sales of PacketPort.com shares to the
public at prices averaging $9.58 per share.
IP
Equity’s officers caused IP Equity to sell PacketPort.com shares
and benefited from the sales proceeds. While IP Equity sold
PacketPort.com 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.