Whistleblower News & Articles

Home > Whistleblower News & Articles > SEC Moves Against COVID-19 Investment Scams

Related Content

The Coming Wave of COVID-19 Fraud Cases: What to Watch Out For

Crises reveal the best and worst of human character. The “better angels of our nature” show up in ways that...

Bob Thomas, WLC Co-Founder, Discusses Covid-19 Fraud on WGBH Program “Greater Boston”

This past Friday evening, Whistleblower Law Collaborative Co-Founder Bob Thomas appeared on Emily Rooney’s WGBH Program Greater Boston to discuss Covid-19 fraud....

SEC and CFTC Encourage Internal Fraud Reporting But Whistleblowers Should Proceed With Caution

Employees who discover SEC and CFTC fraud on the job face many difficult choices about reporting that fraud. At or...

Securities Fraud

The U.S. Securities and Exchange Commission (SEC) whistleblower program offers significant protections and financial awards to individuals or groups of...

SEC Moves Against COVID-19 Investment Scams

May 5, 2020

The US Securities and Exchange Commission is moving aggressively against companies and individuals involved in COVID-19 investment scams.

We have warned of the many ways bad actors will look to make a quick profit off the COVID-19 pandemic. Investors are prime targets for that fraud. Economic uncertainty, market volatility, and a global focus on finding treatments and cures create prime opportunities for scammers.

However, the SEC is using all its tools to police financial markets and protect investors. The SEC is working hard to shut down COVID-19 investment scams before they can spread and cause serious economic harm.

Pump-and-Dump COVID-19 Investment Fraud

A classic pump-and-dump scheme involves spreading positive, but false, rumors about a company to drive up its share price. So-called microcap companies are especially vulnerable to these scams. Many microcap companies are listed on one of the over-the-counter (OTC) markets. Shares of those companies, sometimes called penny stocks, often trade for less than a dollar.

There is limited public information about microcap companies. As a result, it is easy for scammers to spread inaccurate and false rumors to drive up the price of the stock. Scammers use social media, internet chat rooms, or postings on investment websites to spread their false claims.

The past weeks have seen numerous false posts, tweets, and rumors claiming that a certain company has developed a new product or a new service to treat COVID-19. Other examples involve false claims that a company is sitting on a stockpile of specialized equipment, such as N95 masks, it expects to sell at a pandemic premium.

The goal of this false information is to create a buying frenzy that will “pump” up the price of a company’s stock. The scammers then sell, or “dump,” their own shares before the truth comes out. Eventually, once the truth does come out, the stock price collapses.

SEC Suspends Trading to Halt COVID-19 Investment Scams

The SEC can suspend trading in any stock for up to ten days when it believes that information about a company is inaccurate or unreliable. In the last two months, the SEC has issued trading suspensions for over twenty-five companies based on false news involving the COVID-19 pandemic.

On April 30, 2020, the SEC suspended trading of  Nano Magic, Inc. of Bloomfield Hills, Michigan. The SEC noticed false news claiming Nano Magic had a patent for a disinfectant that would “kill coronavirus.” The SEC found that information was inaccurate. In response, the SEC suspended all trading of Nano Magic on the OTC Link market.

On April 28, 2020, the SEC suspended trading of Kleangas Energy Technologies a/k/a CaliPharms of Temecula, California. The SEC stopped all trading of Kleangas stock on OTC Link after finding inaccurate statements on Twitter. The tweets falsely implied Kleangas was involved in sales of personal protective equipment approved by the Centers for Disease Control.

The OTC markets are not the only place where scammers play the pump and dump game. Some of the companies involved in COVID-19 investment scams are traded on the NASDAQ exchange. That is the same market where shares of companies such as Microsoft, Apple, and Cisco Systems are traded.

On May 1, 2020, the SEC suspended NASDAQ trading for CNS Pharmaceuticals, Inc. and Moleculin Biotech, Inc., both of Houston, Texas. The SEC took that action based on statements claiming the two companies expected to “expedite” regulatory approval for a potential COVID-19 drug. The SEC questioned the accuracy and adequacy of those statements. As a result, trading in both companies was suspended.

SEC Charges Florida Company and CEO in COVID-19 Fraud

The SEC is not just suspending trading to halt COVID-19 investment scams. In situations where the SEC can trace the false information back to its source, it has taken more severe actions. For example, filing federal lawsuits to obtain money damages from companies and individuals.

On April 28, 2020, the SEC announced the filing of charges in federal court against Praxsyn of West Palm Beach, Florida and its CEO. The SEC charged the defendants with issuing false and misleading press releases. One of the phony releases claimed that Praxsyn had a “direct pipeline” from a major manufacture of N95 masks. The defendants also announced Praxsyn was in the process of negotiating the purchase of “millions” of masks. In another press release, the defendants falsely claimed Praxsyn would only sell masks in units of 100,000 or more.

As a result of the false press releases the trading volume in Praxsyn stock increased 80 times above its level the prior month.

According to the SEC complaint, it was all a lie. Praxsyn never had a contract with any manufacturer of N95 masks. The company also never had any buyers, let alone a contract to sell 100,000 masks. When the SEC came knocking, the CEO admitted Praxsyn did not possess a single N95 mask. Not one.

The SEC is seeking civil monetary penalties against both defendants. In addition, the SEC is asking that the CEO be barred from serving as an officer or director of any publicly traded company.

Blow the Whistle on COVID-19 Investment Scams

Individuals with information relating to a COVID-19 investment scam can alert the SEC through its Office of the Whistleblower. If you are considering submitting a tip, complaint, or referral to the SEC, we urge you to contact us for a free, confidential consultation to discuss the SEC whistleblower process and review all of your options.

Client's False Claims Act case settles for $12.9 Million
This is default text for notification bar