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SEC Puts the Brakes on COVID-19-Related Pump-and-Dump Scheme

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  • Posted on: Jun 11 2020

In prior posts, we examined Securities and Exchange Commission (“SEC” or “Commission”)   enforcement actions brought against those who seek to personally benefit from the COVID-19 health crisis affecting the country (here and here). These actions had a common thread between them – they involved pump and dump schemes.

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.

Since February of this year, the SEC has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency (here). In these 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.

On June 9, 2020, the SEC announced (here) that it brought charges against Jason C. Nielsen (“Nielsen”), a penny stock trader in Santa Cruz, California, for conducting a pump-and-dump scheme involving the stock of Arrayit Corporation (“arrayit”), a biotechnology company headquartered in Sunnyvale, California that purports to focus on the discovery, development, and manufacture of proprietary life science technologies.  According to the SEC, Nielsen made hundreds of misleading statements in an online investment forum, including a false assertion that the company had developed an “approved” COVID-19 blood test.

According to the SEC, in March and April 2020, Nielsen posted numerous messages on Investors Hub that promoted Arrayit stock claiming that Arrayit had a COVID-19 test; that Arrayit’s COVID-19 test was pending Emergency Use Authorization from the FDA; and that Arrayit had received approval for its COVID-19 test. As readers of this Blog know, during this period, the news cycle was saturated with reports and commentary about the COVID-19 virus, the need for accurate and rapid COVID-19 tests, and the need for increased COVID-19 testing.

[Ed. Note: Investors Hub describes itself as an internet forum in which investors can gather and share market insights.]

At the time Nielsen began posting the messages, he held 114,803,532 shares of Arrayit common stock, which represented 10.19% of Arrayit’s total outstanding shares. At that time, the total market value of Nielsen’s holdings in Arrayit was $1,998,051.26. According to his brokerage account’s opening documents, no one other than Nielsen was authorized to trade in the account. 

According to the SEC, Nielsen made the statements regarding a purported Arrayit COVID-19 test to generate interest in Arrayit stock. Nielsen’s use of those posts, alleged the SEC, was deceptive and misleading because he failed to disclose the extent of his financial stake in the company and the fact that he was actively selling off his shares. The SEC said that Nielsen’s trading records showed that he was dumping his shares close in time to when he was posting messages touting Arrayit’s stock. 

Moreover, according to the SEC, Nielsen’s statements that Arrayit’s COVID-19 test was pending Emergency Use Authorization and that the test was “approved” were false. Arrayit did not submit an application for Emergency Use Authorization to the FDA until on or about April 13, 2020, said the SEC. In fact, noted the SEC, as of the filing of its complaint, Arrayit did not have a COVID-19 test that was approved by the FDA or any other entity.

Nielsen also allegedly created the false impression of high demand for Arrayit stock by placing and subsequently canceling several large orders to purchase shares in a tactic known as “spoofing.”  As explained in the SEC’s complaint, Nielsen allegedly placed large orders for Arrayit stock, subsequently cancelled the orders before they were filled, and then posted messages on Investors Hub falsely attributing these large orders to someone else (often a fictitious investor). The purpose of this spoofing was to create the false impression of a high demand for the company’s securities.

According to the SEC, between March 2, 2020 and April 13, 2020, Nielsen realized a profit of approximately $137,000, as a result of his “pump and dump” scheme.

On April 13, 2020, the Commission temporarily suspended trading in Arrayit stock (here), for the period April 14, 2020 through April 27, 2020, due to “questions regarding the accuracy and adequacy of publicly-available information concerning Arrayit Corporation, including: (a) its financial condition and its operations, if any, in light of the absence of any public disclosure by the Company since 2015, and (b) information in the marketplace since at least March 2, 2020, claiming the Company developed an approved COVID-19 blood test.”

“We allege that Nielsen engaged in multiple forms of deception to exploit investors amidst the COVID-19 pandemic,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office.  “Investors should be aware of the potential for stock manipulation, including through claims regarding products or services related to COVID-19.”

The SEC’s complaint (here), filed in the United States District Court for the Northern District of California, charged Nielsen with violating the antifraud provisions of the federal securities laws, and seeks permanent injunctions, civil money penalties, a penny stock bar, and disgorgement with prejudgment interest.

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