The Securities and Exchange Commission (the "SEC"), following a nationwide sweep to combat Internet fraud, recently filed 23 enforcement actions against 44 individuals and companies alleging violations of the SEC's anti-fraud and anti-touting rules. The crackdown, along with the SEC's establishment of its Office of Internet Enforcement earlier this year, reinforces the message that the SEC is monitoring and aggressively prosecuting securities violations on the Internet .
The SEC's's enforcement actions targeted several types of Internet conduct, including the use of fraudulent "spams" (Internet junk mail), online newsletters, message board postings and Web sites, through which the accused individuals and companies are alleged to have violated the federal securities law. Specifically, the individuals and companies used these methods to "tout" microcap companies by providing false or misleading information without disclosing that they owned interests in or were being compensated by such companies or the amount of such compensation. In some cases, the individuals and companies are alleged to have engaged in "scalping" by selling their stock or exercising their options for a profit immediately following a change in share price that resulted from their recommendations. While none of these practices are new, their impact is magnified because of the extensive audience that can be reached through the Internet.
The SEC has alleged that practices engaged in by the accused individuals and entities violate the following statutes and regulations:
… Section 206(2) of the Investment Advisers Act which prohibits an investment adviser from engaging in any transaction, practice or course of business which operates as a fraud or deceit upon any client or potential client and requires that investment advisers act for the benefit of their clients, requiring advisers to exercise the "utmost good faith in dealing with clients, to disclose all material facts, and to employ reasonable care to avoid misleading clients. Additionally, some of the individuals and companies were alleged to have violated Sections 204 and 207 of the Investment Advisers Act which, respectively, require the filing of reports with the SEC and make it "unlawful for any person willfully to make any untrue statement of a material fact . . .or willfully to omit to state . . . or report any material fact" in any report filed with the SEC.
… Sections 17(a)(2) and (3) of the Securities Act of 1933, which prohibit the use of misrepresentations or omissions of material facts in the offer or sale of any security and make it unlawful to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
… Section 17(b) of the Securities Act of 1933 which makes it "unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not Purporting to offer a security for sale, describes such dealer , without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof."
… Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security and make it unlawful "to make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."
The recent SEC actions bring to 38 the number of enforcement actions, securities promoters that are using the Internet should be on notice that the SEC is monitoring such activities for compliance with securities Internet securities activities this year. As a result of the enforcement actions filed by the SEC in connection with laws and regulations relating to disclosure and good faith dealings with clients and potential clients. The SEC has made it clear that it expects the readers of Internet newsletters, bulletin boards, Web sites, and "spam" that are promoting the securities of specific companies to receive truthful and detailed information with respect to the independence (or lack thereof) of the authors of such publications.
Prepared by Kristin H. Smith, Esq. of the Washington, D.C. Office
This article was first published in the October/November 1998 Issue of Mayer, Brown & Platt's Financial Services Regulatory Report. The Financial Services Regulatory Report is edited by Melody A. Chestnut of the Washington, DC Office.
Copyright © 1999 Mayer, Brown & Platt. This Mayer, Brown & Platt article provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.