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Enforcement News: SEC Charges Company With Disseminating False Information About Supplies of N95 Masks

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  • Posted on: May 4 2020

In times of crisis, unscrupulous people often disseminate false information to the public in the hope of securing a personal benefit from the fear and concern surrounding the event. Such is the case with the COVID-19 pandemic. 

Since February of this year, the Securities and Exchange Commission (“SEC” or “Commission”)  has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency (here). In fact, the SEC has halted trading in the securities of at least 26 companies in connection with alleged false and misleading statements relating to COVID-19. 

In its warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump and dump schemes.

[Ed. Note: In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors.  These rumors cause many investors to purchase the stock.  Then the promoters or others working with them quickly “dump” their own shares before the hype ends.  Typically, after the promoters’ profit from their sales, the stock price drops, and the remaining investors lose most of their money.]

The SEC noted that microcap stocks “may be particularly vulnerable to fraudulent investment schemes, including coronavirus-related scams.” The SEC explained that fraudsters can easily spread false information because there is often limited publicly available information about the companies’ management, products, services, and finances. “This can make it easier for fraudsters to spread false information about the company and to profit at the expense of unsuspecting investors,” said the SEC.

On April 28, 2020, SEC announced (here) that it had brought charges against Praxsyn Corp. (”Praxsyn” or the “Company”) and its Chief Executive Officer, Frank J. Brady (“Brady”), for allegedly issuing false and misleading press releases, claiming the Company was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus. The SEC previously issued an order (here) on March 26, 2020, temporarily suspending trading in Praxsyn securities.

Praxsyn is a Nevada corporation with its principal offices purportedly located in West Palm Beach, Florida. Praxsyn claims to be a “specialty finance company focused on providing cash flow solutions and medical receivables financing to healthcare providers in the US that focus on personal injury and workers compensation.” Neither Praxsyn nor its securities are registered with the SEC. Praxsyn’s common stock is quoted on OTC Link (previously “Pink Sheets”) operated by OTC Markets Group Inc. 

According to the SEC’s complaint (here), Praxsyn issued a press release on February 27, 2020, stating that it was negotiating the sale of millions of N95 masks and “evaluating multiple orders and vetting various suppliers in order to guarantee a supply chain that can deliver millions of masks on a timely schedule.” On March 4, 2020, Praxsyn issued another press release claiming it had a large number of N95 masks on hand and had created a “direct pipeline from manufacturers and suppliers to buyers” of the masks. Brady was quoted in the release as telling any interested buyers that the company was accepting orders of a minimum of 100,000 masks. Despite these claims, according to the SEC, Praxsyn never had any masks in its possession, any orders for masks, or a single contract with any manufacturer or supplier to obtain masks. After regulatory inquiries, Praxsyn issued a third press release on March 31, 2020, admitting that it never had any masks available to sell.

“As alleged in the complaint, in the midst of the ongoing COVID-19 pandemic, Praxsyn and Brady sought to exploit unsuspecting investors by issuing false and misleading press releases concerning Praxsyn’s ability to source and supply N95 masks for the COVID-19 virus,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

“Today’s fraud action against Praxsyn and its CEO demonstrates the SEC’s dedication to investor protection and accountability,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “We will move swiftly against those who seek to profit off this national emergency by cheating or misleading investors.”

“The Enforcement Division is committed to swiftly shutting down COVID-19 investment scams, seeking trading suspensions where appropriate, and pursuing fraud charges against both entities and individuals when warranted,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.

The SEC filed its complaint in the United States District Court for the Southern District of Florida. The SEC charged Praxsyn and Brady with violating the antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctive relief and civil penalties and an officer and director bar against Brady.

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