SEC Charges Trader for COVID-19 "Pump and Dump" Scheme

The SEC charged a California penny stock trader for engaging in a COVID-19 testing "pump and dump" scheme.

In a Complaint filed in the U.S. District Court for the Northern District of California, the SEC alleged that the trader made hundreds of "false and misleading" statements on an online forum in an effort to get others to invest in a biotechnology company. The SEC alleged that the trader made claims that the company had developed a blood test for COVID-19, without disclosing that he owned a large amount of the company's stock or that he planned to sell his shares. The SEC further alleged that the trader used "spoofing," a technique of deception in which the trader places and then cancels, significant orders of the company's stock to falsely portray a high demand for the security. According to the SEC, the trader's deceptive techniques were successful, as the trader ultimately received "substantial monetary gains" from investors.

The SEC found violations of Section 10(b)(5) ("Manipulative and Deceptive Devices") of the Exchange Act, Section 9(a)(2) ("Manipulation of Security Prices") of the Exchange Act, and Section 17(a) ("Fraudulent interstate transactions") of the Securities Act.

The SEC is seeking (i) permanent injunctive relief, (ii) disgorgement of any ill-gotten gains with prejudgment interest, (iii) civil money penalties, and (iv) a bar from participation in any penny stock offering.

Commentary

This case is another example of the SEC's laser focus on COVID-19-related misconduct. The SEC had previously suspended trading in the biotechnology company due to concerns about the information in the market related to its purported COVID-19 test which allowed the SEC to limit the amount of money made by the trader. The SEC has now used its authority to suspend trading in the shares of more than 30 companies and has brought five substantive enforcement actions for misconduct related to COVID-19 scams or other misconduct related to the pandemic. The SEC will continue to aggressively investigate and pursue enforcement actions for any false statements related to COVID-19.

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