The SEC has made it clear that it will be monitoring market activity related to the coronavirus outbreak. The agency’s Chairman and others have declared that they expect companies to be forthcoming about the impact of the pandemic on company operations and finances, and underscored the fact that the agency will be watching. On April 24, 2020, the agency announced that it had formed a COVID-19 market monitoring group. And on April 28, 2020, the agency brought what as far as I know is its first coronavirus outbreak-related enforcement action, when it filed an action against a penny stock company Praxsyn Corporation and its CEO for public claims about the company’s claims about its ability to acquire and distribute N95 face masks. A copy of the SEC’s complaint can be found here. The SEC’s April 28, 2020 press release about the enforcement action can be found here.
The SEC’s Enforcement Action
On April 28, 2020, the SEC filed an enforcement complaint in the Southern District of Florida against Praxsyn and Frank Brady, its CEO. Praxsyn is a “specialty finance company providing cash flow solutions and medical receivables financing to healthcare providers.” The complaint alleges that “in the midst of the ongoing COVID-19 pandemic” the defendants “issued false and misleading press releases claiming that Praxsyn was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus.”
The complaint specifically refers to two of the company’s press releases. The complaint alleges that in a February 27, 2020 press release, which was captioned “Praxsyn Joining the Global Fight to Stop the Spread of the Corona Virus,” the company said it was negotiating the sale of millions of masks that meet the OSHA standards for N95 masks and that the company was vetting suppliers to guarantee a dependable supply.
The complaint also references the company’s March 4, 2020 press release, in which the company said it had large numbers of N95 masks on hand and had – “utilizing a global network — had created a “direct pipeline from manufacturers and suppliers to buyers” of the masks. Brady was quoted in the release as telling any interested buyers that the company was accepting orders of a minimum of 100,000 masks.
According to the SEC’s complaint, both press releases “were blatantly false.” Praxsyn “never had a single order from any buyer to purchase masks, or a single contract with any manufacturer or supplier to obtain masks, let alone any masks actually in its possession.” The complaint alleges that “dozens of emails and other documents” show that Brady and other company officials knew that efforts to obtain and sell N95 masks “were proving futile.” Praxsyn, the complaint alleges, has admitted as much, as on March 31, 2020 – after regulatory inquiries — the company issued a third press release (in which the company “retracted” its prior press releases) acknowledging “it never had masks on hand.”
The complaint alleges further that in response to the February 27 press release, the trading range of the company’s share price approximately doubled and the trading volume increased approximately 80 times, and that the March 4 press release similarly caused the company’s share price and share trading volume to increase as well.
The complaint alleges that the defendants’ actions violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief enjoining Praxsyn and Brady from “violating, directly or indirectly, Section 10(b) and Rule 10b-5 of the Exchange Act.” The complaint also seeks the imposition of civil money penalties and an order barring Brady from servicing as an officer or director of any public company.
The SEC’s press release about the enforcement action complaint quotes an agency official as saying ““As alleged in the complaint, in the midst of the ongoing COVID-19 pandemic, Praxsyn and Brady sought to exploit unsuspecting investors by issuing false and misleading press releases concerning Praxsyn’s ability to source and supply N95 masks for the COVID-19 virus.”
As far as I know, the SEC’s recently filed action against Praxsyn is the first enforcement action the agency has filed based on coronavirus-related allegations. [I encourage any readers aware of any prior actions to please contact me and let me know.]
However, it is worth noting that Praxsyn is only one of nearly two dozen companies with respect to whose stock the agency has halted trading in recent months. As reflected here, the SEC halted trading in the company’s stock on March 25, 2020 (that is, just before Praxsyn issued its March 31 press release retracting its prior press release). As discussed in an April 20, 2020 Law360 article (here), during the period February to April 2020, the agency had halted trading in the stocks of twenty stocks over COVID-19 concerns.
Most of the stocks whose trading the SEC has halted are, like Praxsyn’s, over-the-counter penny stocks. The agency is clearly worried about stock price manipulation schemes, particularly with respect to unsubstantiated claims about the relevant company’s ability to prosper during the pandemic.
In the agency’s various public statements and actions, the agency has made it clear that it intends to police the marketplace aggressively to try to protect investors from unsubstantiated claims by issuers relating to the coronavirus outbreak. The agency’s recent formation of the task force focused on monitoring the market relative to the coronavirus outbreak underscores its commitment to oversee the market and to try to protect against schemes designed to exploit the current pandemic-related disruption.
The SEC’s enforcement action clearly is meant to send a signal to other marketplace participants. Indeed, the agency’s press release about the Praxsyn enforcement action quotes Stephanie Avakian, the co-director of the SEC’s enforcement division as saying as saying that “The Enforcement Division is committed to swiftly shutting down COVID-19 investment scams, seeking trading suspensions where appropriate, and pursuing fraud charges against both entities and individuals when warranted.”
In light of these statements, and in light of the agency’s earlier actions closing down trading in the shares of companies based on concerns about COVID-19-related disclosures, it seems probable that there will be further coronavirus-related enforcement actions to come – perhaps many more.
One added concern for companies that may find themselves the target of pandemic-related enforcement actions is that the agency action could lead to follow-on civil actions, as investors seek to recover damages for alleged misrepresentations. All of these considerations are part of the many reasons why I continue to believe that we will see a significant number of coronavirus-related D&O claims, for many months to come.