On July 17, 2000 the SEC announced that it filed a civil complaint against an internet company and its officer. In addition to fraud charges, the SEC alleged that the defendants engaged in scalping for selling the security they were recommending while making the recommendation to buy, and violation of the anti-touting rules by failing to disclose that they had received 250,000 shares of Winchester stock in return for touting Winchester. The defendnats settlemet the proceedings, consented to an jnjunction, a $20,000 penalty, disgorgement of their profits and prejudgment interest.
According to the SEC release, the primary allegations were that the defendants.
- published on the Internet a stock recommendation on Winchester Mining Corporation (Winchester), an OTC Bulletin Board stock, and
- that they falsely said had been issued by Chase Manhattan Bank (Chase).
The SEC also announced that Chester and JMAX, without admitting or denying any of the allegations in the SEC’s complaint, simultaneously agreed to settle the charges that they violated the anti- fraud and anti-touting provisions of the federal securities laws.
Under the terms of the settlement, Chester and JMAX consented to the entry of permanent injunctive relief, payment of a $20,000 civil penalty, and disgorgement in the amount of $1,425 plus prejudgment interest.
In its complaint, the SEC alleges that Chester and JMAX fraudulently misrepresented that Chase Manhattan Bank had placed a “strong buy recommendation” on Winchester’s stock in an investment review and related press release that Chester and JMAX published on the Internet on December 9, 1999.
The complaint alleges that, in addition to rating Winchester a “strong buy,” the investment review projected that Winchester’s stock, which was then trading at $0.17 per share, could reach $5 per share in 2000.
The SEC further alleges that on the day that Chester and JMAX issued the fraudulent investment review and press release, Winchester became the fifth most actively traded stock on the OTC Bulletin Board.
The SEC’s complaint alleges that, in fact, the investment review attributed to Chase had been prepared by Fredrick Thompson (Thompson), an employee in Chase’s debt collections department, who Chester had recently met in a bar in Tampa and who had no securities industry experience or connection to Chase’s securities operations. The SEC alleges that Chester and JMAX failed to disclose these facts to investors. In addition, Chester and JMAX failed to disclose that Chase had not authorized Thompson or any of its employees to publish an investment analysis of Winchester, and that Thompson never sought Chase’s authorization to publish the review.
The SEC alleges that Chester and JMAX also violated the antifraud provisions of the federal securities laws by engaging in a practice known as “scalping.” The complaint alleges that, at the same time Chester and JMAX were encouraging investors to buy Winchester stock, Chester sold all of the 250,000 shares he and JMAX had received for promoting Winchester without fully disclosing this sale to investors.
Finally, the SEC alleges in the complaint that Chester and JMAX violated the anti-touting provision of the securities laws. According to the complaint, Chester and JMAX failed to disclose in the press release announcing the publication of Thompson’s investment review of Winchester, and on the website on which they published Thompson’s review, that Chester and JMAX had received 250,000 shares of Winchester stock in return for touting Winchester. The SEC’s complaint alleges that the above conduct violated the anti- fraud and anti-touting provisions of the federal securities laws, specifically Sections 17(a) and 17(b) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. [Securities and Exchange Commission v. Jason M. Chester and JMAX Online Communications, Inc., No. 8:00-CV-1443-T-24F, (M.D. Fla.) (filed July 17, 2000).] (LR-16629)
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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