Enforcement News: SEC Charges Two Companies With COVID-19 Related FraudPrint Article
- Posted on: May 18 2020
Pandemic-related fraud is in vogue these days. The unscrupulous continue to disseminate false information to the public in the hope of securing a personal benefit from the fear surrounding the virus.
As we previously noted (here), since February of this year, the Securities and Exchange Commission (“SEC” or “Commission”) has released several investor warnings about the prevalence of fraud, illicit schemes and other misconduct related to 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. Two of these companies, Applied BioSciences Corp. (“Applied BioScience”) (here) and Turbo Global Partners, Inc. (“TGP”) (here) , are the subject of today’s article.
In addition, the Commission has commenced enforcement proceedings against companies that have allegedly committed securities fraud by using the COVID-19 pandemic as its backdrop (here). [Note: This Blog wrote about the SEC’s enforcement proceeding against Praxsyn Corp. and its CEO here.]
Applied BioSciences Corp.
Until the spread of the coronavirus, Applied BioScience focused its business “on the development of science-driven Cannabinoid therapeutics/biopharmaceuticals, and delivering high-quality CBD products as well as state-of-the-art testing and analytics capabilities to our customers.” As demand for products to combat COVID-19 grew, Applied BioScience announced that it was changing its focus from cannabinoid-related products to pandemic-related products. In that connection, on March 25, 2020, Applied BioScience announced that the company had “diverted manufacturing resources to build products that [would] help battle the spread of the coronavirus (COVID-19).” The press release included a hyperlink to a company-affiliated online store that sold hand sanitizer and other products. The press release further stated that Applied BioScience had “formulated its sanitizing blends according to the CDC guidelines to make them as effective as possible in killing harmful germs and bacteria.”
The SEC alleged that the March 25, 2020 press release was misleading because Applied BioScience neither diverted “manufacturing resources” nor “formulated its sanitizing blends” in connection with the hand sanitizer it sold, but rather a third-party manufactured the hand sanitizer sold by the company.
About one week later, on March 31, 2020, the company issued another press release, announcing that it had “begun shipping” a line of home finger-prick testing kits for coronavirus detection. According to the company, these kits could “be used for Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.”
The SEC claimed that the March 31, 2020 press release was materially false and misleading because, among other reasons, Applied BioSciences had not begun shipping the test kits. And, according to the SEC, the company changed its story by “now claim[ing] it did not offer, sell or intend to sell the test kit for home or private use, but rather … intended to screen potential purchasers only to allow purchases in connection with use by nursing homes, schools, military, first responders, or in consultation with a medical professional.”
The SEC also alleged that the press release was materially false and misleading because the company failed to disclose that the FDA had not approved or authorized the sale of any at-home test kits, despite the fact that Applied BioSciences allegedly knew that the test kits were subject to FDA review. In fact, according to the SEC, “just days earlier, the FDA announced on its website on March 20, 2020 that no home-based coronavirus tests had been approved.”
Following the issuance of the March 31, 2020 press release, the price of Applied BioScience’s stock and the volume of shares traded materially increased. The press release was issued before the market opened on March 31, 2020. Once trading began, the company’s stock price increased almost 80 percent from the previous day (from $0.45 per share to $0.80 per share), and its volume increased by a factor of 85 (136,300 shares sold, versus 1600 shares sold on the previous day). From March 31, 2020 through April 7, 2020, Applied BioScience’s closing stock price ranged from $0.45 per share to $0.80 per share, with an average trading volume of 48,985 shares. In contrast, from January 2, 2020 through March 30, 2020, Applied BioScience’s closing stock price ranged from $0.24 per share to $0.69 per share, with an average trading volume of 3,635 shares.
As noted, on April 13, 2020, the Commission suspended trading in Applied BioScience’s securities for ten trading days, effective April 14, 2020.
The SEC’s complaint (here) against Applied BioSciences charges the company with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief and civil penalties.
Turbo Global Partners, Inc.
In February 2020, TGP issued two press releases announcing that it had formed a “strategic alliance” with BeMotion, Inc. (“BeMotion”), a privately held technology company. Under this alliance, TGP would purchase digital vending machines from BeMotion and install them in pharmacies with which TGP had a relationship.
In March 2020, as the COVID-19 crisis escalated, BeMotion signed a contract with a company in China that manufactured thermal scanning equipment. The contract authorized BeMotion to sell the thermal scanning equipment outside of China. The equipment could be installed in retail or other establishments to scan for persons with above normal body temperatures.
BeMotion began looking for possible distributors to assist with the sale of the product. During March 2020, Robert W. Singerman (“Singerman”), TGP’s chief executive officer and chairman, expressed an interest in the company becoming the exclusive distributor for the scanning equipment. BeMotion declined the offer of exclusivity. However, BeMotion advised Singerman that TGP could become a distributor of the equipment only if TGP had customers willing to buy the product. BeMotion and TGP never reached agreement on the terms of any distribution arrangement.
On March 30, 2020, before the close of the market, TGP issued a press release (“the March 30 release”) drafted by Singerman, which discussed BeMotion and its thermal scanning equipment. The March 30 release stated that BeMotion was “[the] front facing Partner in the multi-national public-private-partnership (PPP) for this innovation which simply stated, is the only scanning technology on the planet with non-contact intelligent human temperature screening and facial recognition.”
According to the SEC, the foregoing quoted statement was materially false because BeMotion was not engaged in any public-private partnership or any partnership involving a governmental entity. The SEC also alleged that the scanning equipment in question did not have facial recognition technology. The technology only had face detection ability (i.e., it could distinguish between a face and an inanimate object such as a cup of coffee).
The March 30 release also stated that TGP was “the lead intermediary” and “the U.S. Coordinating agent and Intermediary” for the equipment. The SEC alleged that this was materially misleading because it falsely suggested the company was the sole selling agent in the United States for the product, when BeMotion had previously advised TGP that it would not be the sole U.S. distributor and that it could only distribute the equipment if TGP had customers willing to buy it.
The March 30 release also contained quotes from the CEO of BeMotion about the technology and its deployment. According to the SEC, the CEO of BeMotion did not make or authorize the statements attributed to him in the press release.
On April 3, 2020, TGP issued another press release that was drafted by Singerman. In the release, the company announced that the Governor’s offices for all 50 states and their Chiefs of Staff had been contacted regarding the availability of BeMotion’s equipment, and that each office had been provided “the Technical Documents for our technology.” Singerman also represented that he had personally contacted the CEOs of various major retail companies, such as Target, WalMart, and Costco, and “advised we are standing by to assist with expedited procurement.”
The SEC alleged that the April 3 release was materially false because TGP did not have the technology it described because no agreement had been entered into regarding the technology. The SEC also alleged that TGP’s “contact” with Governors, their Chiefs of Staff and major retailers was not meaningful as such contact consisted of unsolicited emails or faxes.
On March 31, the first trading day after issuance of the March 30 release, TGP’s trading volume jumped to 77.8 million shares from an average volume of 31.9 million shares per day during the 11 trading days before the March 30 release, and its the share price rose to an intraday high of $0.0068, before closing at $0.0044. During the 11 trading days preceding issuance of the March 30 release, TGP’s stock traded between $0.0016 per share and $0.0059 per share.
On April 3 (when TGP issued its press release regarding contacting all 50 Governors’ offices), trading volume reached 76 million shares and the price of TGP’s stock rose to an intra-day high of $0.0194 per share, before closing at $0.0154 per share.
As noted, the Commission temporarily suspended trading in TGP’s securities from April 9, 2020 to April 23, 2020.
The SEC’s complaint (here) against TGP and Singerman charged them with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief and civil penalties, and an officer and director bar against Singerman.
A copy of the SEC’s press release announcing the enforcement proceedings against Applied BioScience and TGP can be found here.