What if the SEC were to Launch a Largecap Fraud Task Force: the Ode to the SEC Edition

The Securities and Exchange Commission (“SEC”) recently launched a Microcap Fraud Task Force. It appears that the SEC’s efforts are already bearing fruit:

Washington D.C., Aug. 5, 2014

The Securities and Exchange Commission today charged four promoters with ties to the Pacific Northwest for manipulating the securities of several microcap companies, including marijuana-related stocks that the agency has warned investors about in recent weeks.

The SEC alleges that the four promoters bought inexpensive shares of thinly traded penny stock companies on the open market and conducted pre-arranged, manipulative matched orders and wash trades to create the illusion of an active market in these stocks.  They then sold their shares in coordination with aggressive promotional campaigns that urged investors to buy the stocks because the prices were on the verge of rising substantially.  However, these companies had little to no business operations at the time. The promoters reaped more than $2.5 million in illegal profits through their schemes.

Two of the companies manipulated in this case – GrowLife Inc. and Hemp Inc. – claim to be related to the medical marijuana industry.  The SEC has issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industries to lure investors into stock manipulation schemes.  Other schemes by these four promoters involved an oil-and-gas company – Riverdale Oil and Gas Corporation – and three other microcap stocks, ISM International, Allied Products Corp, and Aden Solutions.

The SEC was able to unearth the schemes through the work of its recently created Microcap Fraud Task Force.

“Our Microcap Fraud Task Force is taking direct aim at abusive practices and serial violators within the microcap markets like these four promoters seeking to exploit retail investors for personal gain,” said Michael Paley, co-chair of the SEC’s Microcap Fraud Task Force.  “In this case, we meticulously reviewed trading records and developed the evidence necessary to connect these four promoters and their coordinated trading efforts.”

Source: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542594818#.U-GbJvldVz7

Here are a few thoughts that come to my mind:

  • The SEC has done an excellent job recently in addressing microcap related fraud. The SEC (nor any government or private operator) cannot eliminate bad behavior, nor is it to blame for others’ wrong-doing. It can, however, react swiftly, justly, and thoughtfully in the instances of alleged wrong-doing.  The SEC is very clearly part of the solution, not the problem. It is evident to me that they have responded very effectively in many of these recent microcap fraud cases. The SEC was remarkably quick to respond to the CYNK fraud recently, contrary to claims otherwise. The SEC is very clearly part of the solution, not the problem. The SEC deserves praise and the full support of all those willing to speak up against bad behavior in the markets.
  • It remains a shame that it is far easier to earn $2 million by manipulating and promoting stock frauds, rather than exposing them. That being said, we Americans are blessed that the SEC targets the stock fraud promoters, rather than the short sellers who seek to expose them. It seems clear that the SEC is aware that for every 1 short seller who may break the law, there are likely 100s-10,000s+ longs and corporate issuers/managements who break the law via stock manipulation, fraud, etc. Nearly all the illegal profits/injust enrichment are reaped by the longs/corporate issuers.
  • If the SEC were to create a thoughtful and nimble Largecap Fraud Task Force (coinciding with similar efforts on the part of the Justice Department and certain state Attorney Generals)… one can only dream. The societal and market-places benefits would be immeasurable. I estimate the societal and market-place benefits would last for at least a generation. More on this (possibly) later.


“My business is to comfort the afflicted and afflict the comfortable” - Mother Mary Jones

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: