An irreverent Wall Street Blog
Pennystock Sponsored Content Fraud Ends With SEC Bars
April 7, 2016
Direct-marketing material -- sponsored content
-- however you wish to characterize the business of getting out the
word for a fee is okay with me. For the record, I hate sponsored content. I
hate it when it pops up on my online search list. I hate it when it barges in
on my social media sites. I hate all those hyperventilating emails and frenzied
messages that clog my online experience and waste my time. When it comes to
sponsored content about the stock market, I immediately click
"Delete," which is about all the attention that I believe such
direct-marketing material deserves. So . . . we all clear as to how I feel
about sponsored content? Consider a
recent Securities and Exchange Commission settlement involving a purveyor of
Wall Street sponsored content.
Case In
Point
You may remember Tobin S. Smith,
who appeared on Fox News and Fox Business Network from 2000 until his
termination in 2013, which was announced as having resulted from his violation
of the network's policy pertaining to the receipt of compensation for stock
promotion. Smith was the founder, Chief Executive Officer, Chief Investment
Officer, and Chief Research Officer of NBT Group, Inc., which presented itself
as being in the business of publishing so-called sponsored investment research
on behalf of public companies. NBT also produced direct-marketing material for
its clients.
After investigating Smith and
NBT, the Securities and Exchange Commission ("SEC")
filed a Complaint in the United States
District Court for the District of Columbia. Securities
and Exchange Commission, Plaintiff, v. Tobin Smith and NBT
Group, Inc. (formerly Changewave, Inc. d/b/a NBT Communications),
Defendants
(Complaint, United States District Court for the
District of Columbia, 16-CV-00587 / March 29, 2016). The Complaint charged Defendants
Smith and NBT with Fraud in Connection with the Purchase or Sale of
Securities ('34 Act Section 10(b) and Rule 10b-5) and
Nondisclosure of Compensation for Touting Stocks ('33 Act
Section 17(b)). Also referenced in the Complaint were
non-parties IceWEB, Inc. and George Johnson.
The
Complaint characterizes IceWEB as a company involved in the
manufacture and marketing of data storage products, custom-built appliances and
cloud-based software/services. The company's stock trades on the OTC Bulleting
Board and during the cited time period, it traded between 5 and 17 cents a
share, thus falling into the "pennystock" category.
Also referenced in
the Complaint is stockbroker Johnson, who was apparently
barred by the Financial Industry Regulatory Authority pursuant to a settlement
offer on February 18, 2016.
Investor Awareness
Marketing Services
The "Summary" section of the
Complaint, provides us with this
synopsis:
1. This case involves a fraudulent touting scheme. In 2012, Defendant Tobin S. Smith, on behalf of his company, Defendant NBT Group, Inc. ("NBT"), entered into two separate agreements to provide "investor awareness" marketing services promoting IceWEB, Inc. ("IWEB"), a penny-stock company. The Defendants entered into these agreements as part of a scheme involving the now-deceased CEO of IWEB and a broker to inflate the price of IWEB stock. Under the terms of the agreements, Smith's company, NBT, was to receive a total of $330,000 in cash, as well as IWEB stock, for promoting IWEB. Although the Defendants did not receive the full amount contemplated by the agreements, they did receive $165,900 and 1,217,105 shares of restricted IWEB stock in exchange for preparing and disseminating emails, online blogs, articles, and other media touting IWEB, with the goal of increasing IWEB's trading volume and share price. The agreements also provided that NBT could earn over $250,000 in additional compensation if the marketing campaigns succeeded in obtaining a sustained increase in share price ("incentive fees"). The Defendants failed to fully and adequately disclose their compensation or the promised incentive fees for promoting IWEB; they also made additional material misrepresentations and omissions regarding IWEB, including unsupported financial projections, and false representations that Smith was immediately purchasing IWEB stock, that IWEB was an acquisition target, and that Facebook was a customer of IWEB.2. By engaging in this conduct, the Defendants violated the antifraud provisions of Sections 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, and the antitouting provisions of Section 17(b) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77q(b).3. The SEC seeks a permanent injunction prohibiting future violations, penny stock bars, and disgorgement of ill-gotten gains together with prejudgment interest against both Defendants, and a civil penalty against Defendant Smith.
A Ton of
Stock
Nothing like trying to raise
investor awareness, right? The Complaint is a compelling
document and presents its case in chilling detail. As I read through this
sordid tale of stock promotion and pumping, several paragraphs jumped out at
me; for example:
12. On or about May 9, 2012, Johnson, who personally owned approximately 1,520,000 shares of IWEB, and whose customers owned an additional 9,377,681 shares of IWEB, emailed Smith and suggested that Smith get together with IWEB's then CEO.13. Smith understood from his initial communications with Johnson that Johnson owned "a ton" of IWEB stock. Additionally, from a subsequent May 10, 2012 email from Johnson stating "I was just a little early," Smith understood that Johnson's investors were under water, that the stock was not trading, and that the stock price was below what Johnson's clients paid for it.
Incentive
Fees
19. In none of the promotional materials that the Defendants created and issued regarding IWEB from May 21 to May 25, 2012, did the Defendants disclose that IWEB had agreed NBT would be paid incentive fees if the price of IWEB stock increased to a certain level following the May 21-25 marketing campaign.20. Smith understood that IWEB contracted with him through the consulting group because IWEB wanted to increase its number of shareholders, to increase its trading volume, and to "uplist" from trading on the over-the-counter (OTC) market to the NASDAQ. Smith also understood that IWEB had $2 million in outstanding $0.17 warrants that could be converted by the warrant holders to IWEB stock once the stock price increased sufficiently (to about $0.20 per share). Exercise of the warrants would result in IWEB receiving the $2 million from warrant holders purchasing IWEB stock.
Dumb
Luck
And so the wheels spin and the
machinery whirs, and things rotate and move forward. Of course, first things
first: cash on the barrel:
22. On May 18, 2012, the Defendants received two payments totaling $44,500. These payments constituted partial payment for the anticipated email campaign to be conducted on behalf of IWEB.23. On May 21, 2012, the Defendants initiated the campaign regarding IWEB by posting on NBT's website a report authored by Smith entitled "By Dumb LUCK I Just Discovered the PERFECT Tech Stock. . . In My Backyard!" [Emphasis original.] Among other representations, the report states that "NBT is initiating coverage" of IWEB, promising that "We will complete an in-depth report on the company. . . but here is the condensed version of our equities research report in progress." The report sets forth an "initial target [price] of $2.25 or 10X projected 2013 sales of $45 million in their low cost/high efficiency unified data storage systems," a "more than 10X upside from the current price per share of .15." An "About the Author" description at the end of the report includes Smith's picture and states that he is a "Contributor and Anchor Fox News Channel and Fox Business Network," in addition to stating his positions at NBT.
SEC Settlement
By press release date March
29,2016 "Former TV
Commentator Settles Penny Stock Fraud Charges" (Press Release,
2016-60 / March 29, 2016) the SEC
announced that without admitting or denying the allegations in the
Complaint:
Bill Singer's CommentSmith and NBT agreed to be barred from involvement in any future penny stock offerings and must pay disgorgement of $165,900 plus $16,893 in interest. Smith also must pay a $75,000 penalty.
Once again, things on the Street
ain't always what they seem. You'd figure that some guy who was lucky
enough to land a gig as a consultant to a news network and gets to chat about
stocks would be on the up-and-up. Goes to show you that you shouldn't trust
those talkin' heads simply because they got those nice, whitened teeth, the
well coiffed hair, and seem to light up the screen with honesty and integrity.
These days, you can photo-shop honesty, and integrity goes for about $35 a
pound. How did the Godfather of Soul put it? Oh, yeah:
"Don't tell a lie about me and I won't tell the truth about you." Yeaaaaaaah. Owwwww. Uhhhhhh: