Articles Posted in Stock Fraud

Early this month, the United States Department of Justice (DOJ) announced the indictment of five defendants, each of whom have been charged in connection with an $8.4 million “boiler room” and money laundering scheme. [1] In addition to the DOJ’s criminal indictment of the group, the Securities and Exchange Commission also filed a civil case seeking injunctions and civil penalties. [2]

“Boiler room” operations are fraudulent schemes in which high-pressure, coercive sales tactics are used to induce clients into purchasing stocks or other investments. [3] Often, these operations consist of groups of salespeople working from offices in foreign countries who cold-call clients in an attempt to defraud them. [3] The salespeople involved in boiler room schemes are rarely licensed brokers, and the stocks they purport to sell may not exist at all. [3]

In the instant case, the DOJ alleges that the defendants conspired to commit securities fraud when they engaged in a boiler room scheme involving fake investment firms and shell companies used to mislead investors. [1] The alleged scheme operated from approximately June 2019 until August 2021, and defrauded English-speaking investors across the globe of more than $8 million. [4]

Last week, the Securities and Exchange Commission (“SEC”) released its long-awaited report formally debriefing the events that transpired during the January and February 2021 meme stock craze. The 44-page report, titled “Staff Report on Equity and Options Market Structure Conditions in Early 2021” provides SEC staff’s analysis of the mechanisms behind the meme stock phenomenon, ultimately debunking a few theories made popular over social media and other media outlets as the events unfolded.

By way of a brief overview, in January 2021 a group of about 100 stocks experienced monumental price and trading volume fluctuations. These stocks, many of which were consumer-centered companies with high brand awareness, gained rapid attention over social media platforms like Reddit and YouTube.

While the SEC’s report addresses the events and impacts of the meme stock phenomenon broadly, it focuses the bulk of its analysis around GameStop Corp (“GME”), arguably the most famous of the meme stocks.

The recent announcement of securities fraud charges against Trevor Milton, the former CEO of Nikola Corporation, may prove to be the first in a line of similar cases involving electric vehicle (“EV”) companies, and more broadly, companies that go public via SPACs. This situation highlights the importance of careful investment decision making, particularly in the EV and other rapidly growing, highly complex industries.

At the heart of the civil and criminal complaints against Nikola are allegations that as its CEO, Trevor Milton, regularly spread false and misleading information about the progress of Nikola’s EV products and technologies. Nikola’s focus is on manufacturing low- and zero-emissions trucks, and the complaints allege in part that under Milton, Nikola published a promotional video of a prototype truck which did not actually work, but appeared to only because the truck was set in neutral and rolled down a hill.  [1]

Promotional videos like that one, along with Milton’s enthusiastic social media posts and numerous podcast and television appearances, all painted a picture of exciting and impressive forward progress at Nikola, which Federal prosecutors and SEC regulators allege was nothing more than an illusion. [2]

On June 30, 2021, FINRA ordered an approximately $70 Million financial penalty against Robinhood Financial LLC, the highest such penalty ever levied by the regulatory organization.[1] Through its investigation of the firm, FINRA charged Robinhood with numerous violations which had resulted in significant losses to their customers. While Robinhood neither confirmed nor denied the validity of FINRA’s charges, they ultimately agreed to settle with these massive sanctions. [1]

FINRA noted three major violations from its investigation into Robinhood’s conduct and operations as a stock-trading app, each of which merited its own penalties.

First, FINRA found that Robinhood has pervasively and negligently provided false or misleading information to its customers. [1] This false information was circulated in spite of Robinhood’s core mission to “de-mystify finance for all” and “democratize finance,” and ranged from misrepresenting customer account balances and buying power, to erroneous communication about customers facing margin calls. [2]

In the span of the last two months, a digital piece of art sold for nearly $70 million, Jack Dorsey, CEO of Twitter, sold his first tweet for $2.8 million, and a digital Lebron James basketball card went for $208,000. What do these three massive sales have in common? Each transaction was for a non-fungible token (NFT), and together, they signal rapidly growing interest in the cryptographic asset marketplace.

Starting with the basics, what is a non-fungible token?

An NFT is a type of digital, cryptographic asset which exists on blockchain. Fungibility refers to interchangeability – assets like dollars, gold, and even Bitcoin, are fungible, because each unit is worth the exact same amount, and is thus readily interchangeable. On the other hand, each unit of a non-fungible asset has its own unique value and thus is not readily interchangeable – think of assets like property, artwork, and other collectibles. [1]

This week’s unprecedented winter storm in Texas this is the latest reminder of intensifying weather events across the globe, and the damage left in its wake opens up important questions about whether our financial systems are prepared to withstand the impacts of climate change. One of the most important functions of regulatory bodies like the SEC is to protect the market from systemic risks, and there is a widening consensus that climate change is one systemic risk for which the SEC must prepare.

As defined by SEC Commissioner Allison Lee during her keynote speech at the PLI’s Annual Institute on Securities Regulation in November 2020, a systemic risk is “characterized by the following features: (1) ‘shock amplification’ or the notion that a given shock to the financial system may be magnified by certain forces and propagate widely throughout; (2) that propagation causes an impairment to all or major parts of the financial system; and (3) that impairment in turn causes spillover affects to the real economy.” [1]

Put more simply, a systemic risk is one with the potential to result in the downturn, or even collapse, of an entire market system. The ongoing COVID-19 pandemic is one recent example of such a risk, as we continue to see its economic impacts across every sector of the market. During her speech, Lee noted that although the SEC is not in a position to regulate and slow the actual drivers of climate change, it can – and should – address climate risks through standardization of the environmental, social, and governance (ESG) disclosures that financial institutions make.

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