According to the Securities and Exchange Commission (SEC), it was a classic “pump and dump” scheme. While the deli had less than $40,000 in annual revenue, the defendants claimed Hometown had a market capitalization of $100 million.
But two years ago, the stock was worth just one dollar a share.
When prosecuting a pump-and-dump, the SEC usually focuses on how the defendants misled the investors by providing false information about the company. Under the Securities Act of 1933, the “truth in securities” law, investors must receive accurate information about securities that are being offered for public scale. Further, sellers of securities are prohibited from making deceitful claims, misrepresentations, and other fraud to entice investors to make an investment.
In the instant case, the SEC alleges that the defendants took control of the Hometown shares, as well as another shell company. Then the defendants used the entities to acquire privately-held companies in a series of reverse mergers. Through these reverse mergers, the defendants deceived investors: They made it seem like Hometown had more assets than it really held—inflating the company’s value. The defendants then intended to dump (i.e., sell) shares in Hometown holdings at vastly higher prices than the shares were worth.
The SEC’s investigation is still ongoing, and there may be additional defendants and charges. But already, the SEC has charged the named defendants with violations of securities laws, including market manipulation, fraud, and aiding and abetting fraud.
If convicted, the defendants could be required to disgorge any profits and pay civil penalties. Additionally, the defendants would be prohibited from participating in future penny stock offerings (a common source of fraud). Further, the SEC is asking that one of the defendants be barred from serving as a director or officer in future companies.
If you’re working at a company that is deceiving investors with similar tactics (e.g., use of shell companies, reverse mergers, or other mechanisms to distort investments’ value), consider becoming an SEC whistleblower. If your tip leads to successful enforcement action, you may be entitled to an award.
We have years of experience representing SEC whistleblowers, coupled with an SEC Enforcement lawyer on our team and an in-depth understanding of how the SEC Whistleblower Program operates. We are here to assist whistleblowers attempt to maximize their opportunity to receive a financial bounty. For a free, confidential consultation, email us or call us today at (800) 975-4345.