The SEC announced that it had accepted an offer of settlement from a 15 year old defendant who the Commission accused of manipulating the price of 9 different securities, generating profits of $272,000 for himself, using his custodial brokerage account.
According to the SEC, the defendant used the Internet to post messages regarding securities he purchased, often posting 300-400 messages a day. The postings he made to Internet website message boards in connection with the eleven transactions referred to above included baseless price predictions and other false and/or misleading statements, and always caused an increase in the volume and price of the stock. These messages were generally devoid of substantive content and, in addition to false price predictions, touted the stock by claiming, among other things, that the stock was about to “take off,” would be the “next stock to gain 1,000%,” and was “the most undervalued stock ever.”
The SEC’s press release stated that In order to carry out the scheme, the teen would acquire a position in a thinly traded microcap stock, buying between 17% and 46% of the volume on the day of his purchases. The momentum of this purchasing would often cause the price of the stock to rise. Shortly thereafter, almost always on the same day as the purchase, and after the close of the market, he would begin posting false and/or misleading messages touting the stock. He used a fictitious author name for each message. For each stock manipulation he used multiple fictitious author names.
Generally, he would post 200 to 300 identical messages to various Yahoo! Finance message boards during this first round of postings. The next morning, before or as the markets were opening, he would send another wave of identical false and/or misleading messages (the same approximate number of messages), employing additional fictitious author names.
On that day, as the stock price was rising in reaction to the hundreds of messages he had posted, the teen would sell his entire position in the particular stock, always realizing a profit.
The gross profits on the eleven transactions ranged from more than $11,000 to nearly $74,000. In some instances, he would place a sell limit order prior to the close of the market on the day he purchased the stock in order to ensure that he would not miss the price increase of the stock while he was in school the next day. In other instances, he would place the order on the sell date. The posted messages always caused the price and volume of the touted stocks to increase dramatically. On the date that he liquidated his position, the trading volume in the stock reached either record or near record highs. In some cases, the stock reached a 52-week high for both volume and price.
According to the Wall Street Journal, when confronted by investigators, the teen claimed he did not do anything wrong, stating “Everybody does this.”
The SEC press release, complete with a blow-by-blow description of the activies in one security, is available at the SEC’s web site, at http://www.sec.gov/enforce/adminact/33-7891.htm
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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.