SEC Action Regarding False Press Releases
I recently came across an older litigation release where the SEC charged a company and its CEO with making false press releases. I wanted to take a closer look at this regulatory action as it provided a clear example of what the SEC considers when deciding if press releases are false and misleading. Back in September of 2014, the SEC filed a civil action in the US District Court for the Southern District of New York against Michael Pagnano and Heathrow Natural Food & Beverage, Inc. The SEC accused Pagnano of conducting a Pump-and-Dump scheme while at the same time causing the firm to issue misleading and false press releases concerning the company’s operations and business prospects.
Here are some of the facts that the SEC looked at in reaching its conclusions:
- Line of Business: The company claimed to be a manufacturer and distributor of health foods.
- Press Release Claims: The press releases announced the following: A). Sales of Products that the company did not manufacture; B). Baseless revenue projection; and C). non-existent distribution agreements with national retail chains.
- Actual Business Operations: The company lacked the funding to carry out its business operations. This was not disclosed within the press releases.
The SEC alleges in its complaint against Pagnano that the company then issued a series of false press releases in order to increase the price of Heathrow Natural Foods and increase the trading volume so that he could engage in a pump-and-dump scheme. The complaint then goes into a great amount of detail on how these press releases where false. For his troubles, Mr. Pagnano has been charged with violating sections 17, 5 and 10b of the Securities Act. The SEC is seeking monetary penalties and bars against Mr. Pagnano.
We are of the opinion that violations concerning false press releases is an area that needs dramatically more attention from the SEC. It is also our opinion that it is an area of securities fraud that is relatively easy to pursue. Either a company is doing what it claims and has the resources to carry out its operations, or it does not. It is fairly black and white.
This enforcement action should also serve as a lesson for the investing public. A review of the Heathrow Natural’s filings with the SEC shows that company de-registered, and stopped filing reports with the SEC in mid 2007. While we understand why many companies legitimately chose to save on the expenses of being a publicly reporting company, it should also serve notice as to the limited financial resources of the company. It should also be noted that Heathrow Natural began providing financial disclosure through OTC Markets in early 2009, thus providing disclosure that investors could review. We looked at the financial statements and their notes for varying periods in 2009 and 2010. They clearly raised doubts about the company’s ability to perform on any of the claims in its press releases. The lesson here is very clear, all investors should view all press releases from public companies they are considering investing into with a certain level of skepticism. The issuance of a press release should never be the trigger event to buy stock in the open market; what should be is a reason to start further due diligence research on a company. The best places to start this research are the SEC’s Edgar database and OTC Markets.
A copy of the SEC’s Litigation Release can be found at: https://www.sec.gov/news/press-release/2014-212
A copy of the SEC’s complaint in this action can be viewed at: http://www.sec.gov/litigation/complaints/2014/comp-pr2014-212.pdf
We do applaud the SEC’s efforts to police this type of activity.
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