The United States Securities and Exchange Commission urges investors to beware of coronavirus pandemic scams and to carefully consider claims related to treatments, therapies and equipment that promise great returns for investors.
The virus that has sickened more than 2.3 million Americans has also attracted bad actors seeking to profit from the worst public health crisis since the deadly flu outbreak in 1918.
“We have seen in other periods of crisis that people are trying to take advantage,” said Steven Peikin, co-director of the SEC’s Compliance Division, in an interview with MarketWatch. “We saw it with SARS, with Ebola, with Hurricane Katrina, and after 9/11. Many people want to take advantage of investor concern and interest, and we have seen it in spades in relation to this crisis. ”
The proliferation of press releases and social media posts from individuals and companies claiming to have cures, home test kits, or products that guarantee immunity has already prompted the agency to temporarily halt trading in the stocks of more than 30 companies in an effort to protect investors
‘We have seen in other periods of crisis that people try to take advantage of it. We saw it with SARS, with Ebola, with Hurricane Katrina, and after 9/11.
In May, the SEC filed charges against Florida-based Praxsyn Corp. PXYN,
and its CEO for falsely claiming that they were negotiating the sale of millions of N95 masks. These masks are in high demand among healthcare workers and people at high risk, as they can prevent the spread of the virus through the drops that are released when people cough or speak.
That same month, the agency filed a complaint against Applied Biosciences Corp. APPB,
in federal court for the Southern District of New York over a press release issued on March 31 that said he had begun offering and sending alleged fingerprinting COVID-19 evidence to the general public. The tests could be used for “homes, schools, hospitals, law enforcement, the military, public servants or anyone who wants immediate and private results,” the statement said, and could produce results in less than 15 minutes.
The complaint alleged that the tests were not intended for home use and could only be used with the help of medical professionals. She further alleged that the company had not submitted any such evidence as of March 31.
For more, see: SEC Files Charges Against 2 More Companies for False Claims About COVID-19
The problem is so widespread that the SEC created a coronavirus steering committee in March led by Peikin and its co-chief compliance officer, Stephanie Avakian. The committee is tasked with proactively identifying fraud and coordinating the SEC’s response to ensure that it is consistent in the agency’s operations of more than 1,400 people in 12 offices.
“Steering committees are rare,” said Avakian. “But it is not just about the pandemic. In mid-March, it was clear that we were not only in the midst of a health crisis, but we were also dealing with markets that were highly disrupted and volatile, and for both pieces we have a historical precedent to consider. ”
When the stock market underwent abrupt changes, with the DIA Jones Industrial Average DJIA,
Moving through thousands of points in a single day at the peak of turbulence in March and repeatedly causing circuit breakers, the agency could look back on things that happened during the 2008 financial crisis.
Refund requests, for example, can be a red flag if investors can’t get money from investments. That’s how a famous scammer, Bernie Madoff, was discovered during the 2008-09 financial crisis. Madoff’s massive Ponzi scheme came to light when he couldn’t keep up with investors seeking to withdraw his money.
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“Those dynamic market correction scenarios can reveal past misconduct,” said Peikin. “It also creates opportunities for people to engage in mischief.”
Some of those antics likely stem from players drawn from the recent surge in interest in stocks from less experienced investors. Brian Reynolds, chief market strategist at Reynolds Strategy LLC, said market data in recent months has revealed that investor flows come “disproportionately” from retail investors.
“[R]electronic investors … are raising the price of the shares owned by the institutions and also engaging in crazy schemes, “Reynolds wrote in a recent note to clients.” This behavior may not continue forever, but it can go on for a while. “
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So how does the SEC manage to track down all the false information that could lead investors to lose money? “We take a holistic approach and look at all kinds of sources, starting with the news,” said Peikin.
The agency monitors trading activity, particularly in stocks that are volatile, and tracks whether stock movements appear to be driven by news or if they are inexplicable and suspicious. The agency relies heavily on references from FINRA, the self-regulator for the brokerage industry. He also listens to the Department of Justice, the Federal Bureau of Investigation and the investment public.
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In a typical year, the SEC receives between 17,000 and 20,000 letters of complaint from investors, but the numbers soared 45% in the period from March 15 to June 15, Avakian said.
The regulator also obtains information from short sellers, which it evaluates on a case-by-case basis.
“We get a lot of information from market participants,” said Avakian. “We always have to assess whether the information provider has a financial interest, long or short term, but that does not necessarily invalidate their claim.”
So how should small investors approach investment during the pandemic?
As with any investment, investors must do their homework, Avakian said.
Start by visiting Investor.gov on the SEC’s website and read the guidelines to prevent fraud. In addition to tools and calculators to help understand investment, the site offers plenty of tips to avoid being scammed by scammers targeting retirement savings or even charitable investment scams. Investors should always do their own research on any potential investment and use common sense.
“If it sounds too good to be true, it probably is,” he said.
Investors should always ask questions. They should be careful with unsolicited offers that come out of nowhere as it is often a red flag. Any promise that comes up as a “sure thing” must be taken with a grain of salt.
“Certainly some companies will propose a vaccine or treatment, but we don’t know which ones yet, so it is important to do your research,” he said.
Read: Supreme Court Rules SEC Can Recover Unlawfully Earned Profits in Fraud Cases
In a sign that the work of the steering committee is helping, the number of suspensions from stock trading has started to decrease. Still, Avakian and Peikin said they expect more charges to be filed, and admit that there are numerous investigations pending.
A typical SEC fraud investigation takes approximately two years to complete. The Praxsyn case took just 61 days.
“It suggests that the message has been heard by those who would engage in this behavior,” said Peikin. “But we don’t pretend to have them all. There is more work to do. ”
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