On August 18, 2000, the SEC announced that it filed a civil complaint against an Internet company and its owners, alleging that the company distributed press releases and other communications via the Internet touting numerous OTC and NASDAQ quoted stocks without properly disclosing that the companies compensated the promoter
The SEC alleged that in press releases and mass facsimile and e-mail distributions, the promoter distributed highly favorable information concerning the issuers that was intended to create immediate increases in the trading volume and share-price of the issuers’ stock. On its website and in communications with prospective clients, the promoter boasted that its services often resulted in immediate increases in volume and share-price appreciation for its clients’ securities.
As compensation for its promotional efforts, the firm and its principals received shares of the touted issuer’s stock. The amount of shares received was dependent upon the share price increase during the promotional efforts. With respect to many of its touts, the firm did not disclose that its promotional and touting activity was bought and paid for by the company whose stock was being touted and that its investment advice, therefore, was not disinterested. For other touts, the firm disclosed generally that it “may” be compensated in stock or that it was hired by the issuer, but it did not fully disclose the nature and amount of compensation.
The SEC also alleges that the firms’s promotional efforts had the intended effect of increasing the issuer’s stock price. For example, after the promotion of one OTC stock, the issuer’s shares increased 400% in the first two days after the dissemination of Merger’s promotional release. In another instance, shares of another client increased 66% in the three days following the tout of the company’s stock. Typically, however, the impact of the promotional efforts was short lived, and the price of its clients’ stock returned to the pre-tout price within a few days.
The defendants, without admitting or denying any of the allegations of the SEC’s complaint, simultaneously agreed to settle the charges that they violated the anti-touting provisions of the federal securities laws. Under terms of the settlement, each of the defendants will be permanently enjoined from future violations of Section 17(b) of the Securities Act of 1933. In addition, the proposed judgment orders the firm to pay a civil penalty of $50,000 and its officers to pay a civil penalty of $10,000 each.
[SEC v. Merger Communications, Inc., Jukka U. Tolonen, and David A. Drake, Defendants, Civil Action No. H-00-2791, USDC, SDTX/Houston] (LR- 16656)
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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.