More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
The SEC on Monday charged two British twin brothers who, beginning in 2007 when they were 16, defrauded up to 75,000 mostly-U.S. investors from whom they raised $1.2 million while at the same time receiving $1.8 million from ‘stock promoters’ to raise the market value of certain penny stocks. The brothers failed to inform their newsletter readers of their, um, conflict of interest in the case. It gets better.
Alexander and Thomas Hunter sold $47 annual newsletter subscriptions in which they shared the findings of a stock-picking robot named Marl that they said had analyzed the over-the-counter market and then would predict weekly a specific penny stock that would double in price. Those stocks, however, were ones from companies that paid the Hunter brothers a total of $1.86 million for the brothers’ newsletter subscriber list. On their Equitypromoter.com site, the SEC said the brothers told penny stock promoters that “One email to this list of people rockets a stock price.” Separately, the brothers also sold a ‘home version’ of the stock-picking robot at a separate fee of $97 to a number of investors.
There was no robot. Instead, the SEC complaint reads, the stocks “‘recommended’ by the newsletters and software were simply those that promoters had paid the defendants to tout.”
Moreover, the complaint says that when the Hunters were soliciting bids from freelance software writers to create the home version of Marl, Alexander Hunter said he needed a “small software program which will appear to the user that once running it is analyzing thousands of penny stocks. Every so often, the software will find a stock, and a message will appear from the system tray, and on the program showing the ticker symbol. IMPORTANT: This software does not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in.”
Filing its complaint in U.S. District Court for the Southern District of New York, the SEC said the Hunters created the sites Doublingstocks.com and Daytradingrobot.com to “falsely tout that a former trading algorithm programmer from a large investment bank” had designed Marl. Specifically, the brothers said that a ‘Michael Cohen’ had created Marl as a contractor for Goldman Sachs. However, there was no such person at Goldman Sachs, the SEC’s complaint dryly points out.
The commission said it is seeking permanent injunctions, disgorgement of all ill-gotten gains with prejudgment interest, and financial penalties from the Hunters.
The complaint alleges that the Hunters, who are now 20 and are citizens and residents of the U.K., would send out their newsletters “near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors with shares worth less than they had purchased them for earlier in the day.”