The Securities and Exchange Commission recently announced that California’s so-called “stock trading whiz kid” will pay $1.5 million as settlement for federal rules violations. The charges related to alleged fraud committed against subscribers to stock alert services, an online chat room and newsletters.
How can investors spot fraudulent sources of information and identify legitimate publishers?
“Whiz Kid” Fraud Allegations
The recent case involved questions about whether the defendant, Manuel E. Jesus, and his company Wealthpire Inc. were guilty of defrauding subscribers to stock alert services and an online chat room — which the SEC in a press release grouped under the category of “newsletters.”
Regardless of the format of communication, the case raises red flags about when and how vehicles like newsletters might be used for fraudulent purposes. For instance, claims made in newsletters, stock alerts and other media can falsely represent the success record of recommended investments.
The SEC alleged that the California defendant violated Rule 10b-5 of the Securities Exchange Act of 1934, known as the Employment of Manipulative and Deceptive Practices. Under the regulation, it’s unlawful to provide false information, leave out relevant information or otherwise deceive someone relating to stock and securities transactions.
Avoiding Newsletter Deception
How can investors avoid fraud of the type alleged in the “whiz kid” case?
In an Investor Alert, the SEC notes that “newsletters” can come in various forms, including those that are free or are provided at a cost, and those that are online or printed. Fraudulent newsletters can promote schemes including:
- Scalping, or pushing a specific stock in order to increase the price, then selling to reap profits.
- Touting, or pushing a specific stock without letting readers know there was compensation for the promotion.
- Failing to disclose conflicts of interest.
- Making false claims about investment performance.
Investors should understand that newsletter publishers can make money even if they are not actively placing trades, since they may sell after the price goes up.
The SEC notes some warning signs investors should watch for when newsletters promote specific stocks, including:
- A lack of disclosures about compensation for promoting the stock.
- Disclosures that don’t provide comprehensive information.
- Disclosures that are hard to find or that appear in very small print.
- Newsletter representatives requesting information from investors about their stock purchases.
- Pressure on readers to purchase a stock quickly or for a limited time.
- Assurances of high returns.
Recognizing Legitimate Publishers
Not all newsletter publishers are attempting to defraud investors, of course. In fact, Section 202(a)(11) of the Investment Advisers Act of 1940 excludes publishers of “bona fide” news magazines, newspapers, or business or financial publications from classification as investment advisers.
How can investors know if a publisher is legitimate?
A U.S. Supreme Court decision clarified the definition. The court ruled that publishers must meet three conditions to qualify for the exclusion:
- The publication in question must provide “impersonal advice” only, or advice that is not customized to meet the needs of a specific client.
- The publication can include only “disinterested” analysis and not “promotional material” from someone with a stake in pushing specific securities or providing customized investment services.
- The publication must be issued regularly rather than occasionally in response to specific market events.
If you’ve been burned by bad information from a questionable newsletter or another form of communication, consider speaking with an experienced securities and investment fraud attorney.
Categories: Stock Market
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