Feds Go After Stock-Picking Writers That Were Secretly Paid To Hype Up Investments

Image courtesy of David Shankbone

The internet is not lacking in prognosticators telling you which stocks you should or shouldn’t buy. If any of these folks are being compensated — even indirectly — to promote an investment, then they are breaking the law. Today, the Securities and Exchange Commission took action against 27 individuals and companies for their part in hyping up investments without disclosing that money had changed hands.

Under the federal Securities and Exchange Act and its related regulations, it’s against the law to use deception in the sale of securities.

According to the SEC, a number of publicly traded companies hired outside promotional firms to talk up their stocks. These firms then hired and paid writers to write glowing pieces about these investments, but without the required disclosure that they had been compensated indirectly by the companies they wrote about.

In one lawsuit [PDF] filed by the SEC in federal court this morning, the government accuses the operators of a now-shuttered Nevada-based company Lindingo Holdings of taking money from publicly traded companies to write articles that “appeared to be objective and independent, when in fact, they were simply paid promotions.”

The government also alleges this lack of disclosure is not a matter of not knowing the law. The complaint says that Lindingo managers “declined to use writers who indicated they would disclose compensation and, in some cases, explicitly directed writers not to disclose compensation.”

A similar second lawsuit [PDF], against New York-based CSIR Group, says employees at the firm “knew or were reckless in not knowing that no disclosures of compensation were made by the writers. Indeed, they even assured prospective clients the public would not know the articles were paid promotions.”

The complaints cite examples of apparent fraud, like one writer who worked for both Lindingo and CSIR, and used at least 10 pseudonyms — including “Equity Options Guru” — in addition to his own name.

The SEC also brought a dozen administrative proceedings against other firms, their writers, and some publicly traded companies for their involvement in allegedly pumping up stocks without revealing they had been paid to advertise these investments.

According to the SEC [PDF], drug company Galena Biopharma — through its former CEO — hired two firms, Lindingo and another company called DreamTeam, to publish positive stories about Galena, sometimes on well-known sites like SeekingAlpha.com, while affirmatively claiming that they had not received compensation. The government also says that Galena provided stock options to Lindingo.

Galena has agreed to pay a civil penalty of $200,000 while its former CEO Mark Ahn will pay a total of $667,250. In total, the parties that have settled with the SEC will pay nearly $5 million, though some — like Galena — did not admit any wrongdoing.

In total, the SEC says that the parties involved in today’s actions published more than 250 articles where it was falsely stated that the author had not been compensated by the companies they were writing about.

“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public.  These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.

In addition to the charges and settlements brought today, the SEC released an investor alert warning that these sort of pay-for-praise schemes may continue, and that investors should always research multiple sources before deciding where to put their money.