On April 10, 2017, the Securities and Exchange Commission (“SEC”) announced that it brought enforcement actions against 27 firms and individuals. According to the SEC, these firms and individuals published articles on investment websites about various companies’ stock. The articles did not disclose to investors, however, that they were not “independent, unbiased analyses,” and they allegedly gave investors the opinion that they were. The articles also did not have any disclaimers stating that the authors were being paid for promoting various companies’ stock.
The SEC conducted investigations through which it found that public companies engaged promoters or communications firms to create publicity for their stocks. The promoters and communications firms then employed writers to write articles about the companies. These articles, however, did not inform the public that the writers were receiving compensation from the public companies. The SEC claims that, because these articles did not disclose the compensation arrangement, they created the impression that they were impartial when in fact they were “nothing more than paid advertisements.” Moreover, the SEC found that more than 250 articles contained untrue statements that the writers were not being paid by the companies that their articles were discussing. As a result, the SEC is alleging that the relevant firms and individuals committed fraud.
The SEC also alleges that the relevant firms and individuals employed various dishonest methods to conceal the fact that the articles were biased. One writer used both his own name and at least nine different false names when writing articles. A firm required some of the writers it engaged to sign non-disclosure agreements that provided that the writers could not reveal the fact that they received compensation.
The SEC charged three public companies, seven stock promotion or communications firms, two company CEOs, six individuals who worked for various firms, and nine writers. As of now, 17 entered into settlement agreements with the SEC where they consented to disgorgement or penalties. The amount of the disgorgement or penalties varies from $2,200 to about $3 million, and the amounts are determined by the “severity of their actions.” Litigation is still ongoing against the 10 remaining relevant firms and individuals.
In light of this case, the SEC issued an investor alert. This investor alert provides that, because of the events in this case, investors should be aware that there may be biased articles on investment websites that are masquerading as “an unbiased source of information.” It further cautions investors not to make investments based solely on the information featured on an investment research website. Rather, investors should examine the company they are contemplating investing in using a variety of sources.
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