In prior enforcement actions the agency filed in the wake of the coronavirus outbreak, the SEC has made it clear that it intends to target companies and individuals that are seeking to secure gains by misrepresenting to investors the companies’ ability to profit from the pandemic. On June 9, 2020, the SEC filed what is the latest of these pandemic-related enforcement actions. In its complaint, the agency alleges that a penny stock trader engaged in a fraudulent pump-and-dump scheme involving the stock of a biotechnology company. The SEC alleges he drove the company’s share price by making hundreds of false statements about the company in an online forum, and then after the company’s share price rose, he sold his stock for significant profits.
The Enforcement Action Complaint
On June 9, 2020, the SEC filed a civil enforcement complaint in the Northern District of California against Jason C. Nielsen, whom the agency describes in its press release as a “penny stock trader.” The first line of the agency’s complaint alleges that “During the COVID-19 pandemic, Defendant Jason C. Nielsen defrauded investors for his personal profit.”
The complaint alleges that between March 2, 2020 and April 13, 2020, Nielsen engaged in a scheme regarding the stock of Arrayit Corporation, a biotechnology company. At the beginning of the period, Nielsen owned about 10% of Arrayit. The complaint alleges that Nielsen sought to drive up the price of Arrayit’s shares by posting hundreds of false and misleading messages about the company in an online forum.
The complaint alleges the messages Nielsen posted in the forum including several different type of statements in order to “pump up” the price of Arrayit’s stock, including statements that the company had developed a COVID-19 test, had an Emergency Use Authorization application pending with the FDA, and had received FDA approval for a COVID-19 test, and statements that Nielsen himself and other investors had purchased or intended to purchase Arrayit stock. The complaint further alleges that Nielsen omitted to disclose his financial interest in the company and that he actually intended to “dump” his shares.
The complaint also alleges that Nielsen engaged in a deceptive technique known as “spoofing” in which he placed and cancelled large order of Arrayit stock to give the false appearance of high a high demand for Arrayit’s shares.
The complaint alleges that Nielsen succeeded in driving up the price of Arrayit’s shares, permitting Nielsen to dump his shares at a substantial profit. The complaint alleges that Nielsen made profits of approximately $137,000 in six weeks. On April 13, 2020, because of concerns about the accuracy of publicly available information about Arrayit, the SEC temporarily suspended trading in Arrayit’s shares.
The SEC’s complaint charges Nielsen with violating the antifraud provisions of the federal securities laws, and seeks permanent injunctions, civil money penalties, a penny stock bar, and disgorgement with prejudgment interest.
The agency’s press release quotes the head of the SEC’s San Francisco regional office as saying “We allege that Nielsen engaged in multiple forms of deception to exploit investors amidst the COVID-19 pandemic,” adding that “Investors should be aware of the potential for stock manipulation, including through claims regarding products and services related to COVID-19.”
The action filed against Nielsen represents the fourth coronavirus outbreak-related civil enforcement action that the SEC has filed so far. The action against Nielsen, like the three previously filed pandemic-related enforcement actions, relate to alleged misrepresentations by or about companies pertaining to COVID-19 safety equipment and prevention products (including, for example, face masks, thermal scanners, test kits, hand sanitizer, and the like). The common thread among the actions is that in each case the enforcement action defendant misleadingly tried to convince investors that the company involved was positioned in some way to be able to profit from the pandemic.
(As a side note, in addition to the four enforcement actions, the SEC also last week filed a books and records complaint in the Southern District of Florida against an investment firm based on the firm’s failure to produce requested documents during a Commission examination. Among other things the Commission is investigating the firm’s attempt to capitalize on investor interest in investing in companies that make products or treatments relevant to the pandemic. The firm operated several websites that tout investment opportunities in COVID-19-related products. The SEC’s June 3, 2020 press release about the books and records action can be found here.)
As noted in a June 9, 2020 Harvard Law School Forum on Corporate Governance article about the SEC’s COVID-19 enforcement actions (here), “since the onset of the COVID-19 pandemic, the SEC has aggressively messaged its intent to remain vigilant and protect investors from fraud in the current environment.” The SEC, the article’s authors note, has already demonstrated its commitment “to target companies that it views as taking advantage of the volatility and instability inherent in the pandemic.”
Though the number of SEC enforcement actions is so far relatively modest, the likelihood is that there will be more COVID-19 related enforcement actions to come. In a series of statements and actions, the agency has shown its intent actively monitor the markets for “frauds, illicit schemes and other misconduct relating to COVID-19.” Among other things, the agency’s Enforcement Division has formed a Coronavirus Steering Committee to focus on fraud, insider trading, disclosure improprieties, and market-moving pronouncements relating to the pandemic. The likelihood is that there will be further SEC enforcement actions in the weeks and months to come.
As the pandemic transitions from a public health crisis to an economic recovery crisis, the nature of the alleged frauds likely will change as well, from alleged misrepresentations about a company’s ability to profit from the pandemic, to allegedly deceptive statements about a company’s financial condition, ability to rebound, and pace of recovery.