Claims about companies having finger-prick Covid-19 tests, N95 respirator stockpiles, and mask-making abilities have fueled a crackdown against suspicious stocks at a level not seen since the Obama administration.
The Securities and Exchange Commission issued 49 trading suspensions in the five months starting with the first one related to the coronavirus Feb. 7, according to a Bloomberg Law review of agency records. The agency linked more than two-thirds of them to Covid-19. It’s the most suspensions during that period since 2015, and almost four times as many as in the same period in 2019.
“It’s a powerful tool, especially because it can be quickly deployed to minimize investor losses,” said Democratic SEC Commissioner Allison Lee, who once worked in the agency’s enforcement division.
The suspensions appear to mark increased attention to microcap fraud under Chairman Jay Clayton, though the SEC has long warned investors that hot news topics drive pump-and-dump schemes and other wrongdoing.
The commission temporarily stops trading when it has questions about potential market manipulation and fraud, possibly leading to a lawsuit after further investigation. This year’s suspensions have led to five cases against alleged scammers whom the agency accused of making false or misleading statements about face coverings, blood tests, and other coronavirus-related business prospects for several microcap companies.
An SEC spokeswoman declined to make Clayton or enforcement co-directors Stephanie Avakian or Steven Peikin available for an interview. But Peikin said during a securities enforcement forum in May that the suspensions have been a “critical” part of the agency’s response to the coronavirus.
Making a Case
Bloomberg Law reviewed SEC data on trading suspensions the commission ordered from Feb. 7 to July 6 for 2010 to 2020. The data was gathered from the agency’s “Trading Suspensions” webpage.
The 49 suspensions from 2020 are at least 30% higher than the number of suspensions in 2018, 2017, and 2016, the last full year of the Obama administration. Only 2015 and 2014 had higher tallies over the past decade.
It isn’t clear what drove the numbers in 2015 and 2014, though the SEC’s enforcement priorities have changed between the Obama and Trump administrations. Mary Jo White, who was chairman from 2013 to 2017, embraced a “broken windows” strategy focused on fostering compliance at firms and companies by aggressively chasing smaller violations. Clayton, who became chairman in 2017, has since moved away from that approach as he targets retail fraud.
The agency couldn’t ignore fraud connected to the coronavirus, regardless of who was chairman, said Valerie Dahiya, a former branch chief in the SEC Division of Trading and Markets Office of Trading Practices.
“There was a significant amount of pressure for the SEC to look at Covid-related claims,” said Dahiya, a Perkins Coie LLP partner.
A suspension generally comes after the Financial Industry Regulatory Authority, an investor, or someone at the SEC alerts the commission to issues about the quality of information that’s provided about a publicly traded company or sees the company’s stock involved in unusual trading. SEC enforcement staffers then do some fact-finding to see whether the tips seem legitimate and will advise the commission on whether a suspension is warranted.
Suspensions aren’t filed in the commission’s in-house court or federal court. Rather, they are orders that stop trading in a stock for as many as 10 business days, unless the company successfully petitions the agency to lift the suspension. Enforcement cases sometimes follow.
“The more evidence of fraudulent conduct, harm to investors, or the harm to the market overall, will increase the probability that the Enforcement Division will take up a case,” Dahiya said.
‘Desperate’ for Headlines
The SEC’s first case related to Covid-19 came in April against health-care company Praxsyn Corp., which previously had trading in its securities suspended in February over questionable claims it could obtain a large amount of N95 masks, according to the agency.
Another company, Applied BioSciences Corp., sent out a press release saying it started sending out finger-prick Covid-19 tests that “anyone wanting immediate and private results” could use, according to an SEC complaint filed in May. In reality, the tests weren’t meant for home use by the general public and hadn’t been shipped yet, the agency said. The press release also failed to mention the Food and Drug Administration hadn’t approved the tests, according to the commission.
Other companies, including Sandy Steele Unlimited Inc., had their stock used in a pump-and-dump scheme that netted more than $25 million, the SEC said in a complaint filed in June.
Canadian Nelson Gomes worked with others to unload stock with sales that sometimes included promotional campaigns related to the coronavirus, the SEC said. Sandy Steele, for example, “makes clothing but also has the possibility to manufacture health masks,” one promotional statement said, according to the agency. The company has reported no revenue, inventory, or assets beyond claims on its website, the commission said.
A lawyer for Applied BioSciences didn’t respond to a request for comment and a lawyer for Gomes couldn’t be identified.
Stanley Morris, a Corrigan & Morris LLP partner representing Praxsyn, said his client and its investors shouldn’t be “destroyed for what at most constitutes one sloppy press release that was quickly corrected.”
“The government seemed to be in desperate need for headlines,” he said.
The cases are SEC v. Praxsyn Corp., S.D. Fla., No. 20-cv-80706, complaint filed 4/28/20, SEC v. v. Applied BioSciences Corp., S.D.N.Y., No. 20-cv-03729, complaint filed 5/14/20, and SEC v. Gomes, D. Mass., No. 20-cv-11092, complaint filed 6/9/20.
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