Safe Harbor for Stock Pumping Scheme?

stock.jpgFor some reason, my hotmail account attracts an inordinate number of pump-and-dump stock-scam emails. One today caught my eye. It shouted in bold type:

Investors Watch Out! BIG ALERT FOR TUESDAY SEPTEMBER 5! LITL [DH: a computer company] IS GETTING READY FOR THE HUGE SEPTEMBER RALLY! LITL HAS POSTED GAINS TOPPING 400% THESE PAST FEW WEEKS AND IS NOT STOPPING!

Now, there are a few funny things about this email. For one, this is a penny security, traded only in the Pink Sheets, of a computer company that has (to my mind) a poorly designed, and very hard to find, webpage. Second, the email’s claim of historical performance is somewhat misleading – it seems quite likely that the stock’s recent surge is due to emails just like this one. Third, the email contains some great disclaimers in fine print:

“Disclaimer: Information within this email contains “forward looking statements” within the meaning of Section 27(a) of the Securities act of 1933 and Section 21B of the Securities exchange act of 1934 . . . None of the material within this report shall be construed as any kind of investment advice or offer to sell or solicitation of an offer to buy securities. Many of these companies are on the verge of bankruptcy. You can lose all your money buy investing in this stock. Any reference to past performance(s) of companies is specially selected to be referenced based on the favorable performance of these companies. You would need perfect timing to achieve the results in the examples given . . . In compliance with the Securities act of 1933, Section 17(b), the publisher of this newsletter discloses that they received payment from an unaffiliated third party for the circulation of this report in the amount of one million free trading shares of LITL . . . .”

I love this, on so many levels: the mix of legalese and frankness, the disclosure of the conflict (but not its source), and the idea, most of all, that somewhere, some young (?) lawyer drafted this sucker thinking that it would protect his or her client. But I don’t believe that it would, if the SEC came calling. Do any of our readers?

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5 Responses

  1. arthur says:

    The disclaimer will protect the promoter from being charged under section 17(b). Why do you think it would not? The “forward looking statement” disclosure may be insufficiently specific to be effective, depending on what appeared in the ellipis. Also, it should reference section 27E of the 1934 Act, not 27B. Without those disclosures, the promoter would be in serious jeopardy. It’s possible that the promoter is misrepresenting his personal belief on how the stock will perform, but that would be almost impossible to prove, so the SEC probably won’t even try. This lawyer earned his keep.

  2. conrad erb says:

    dave – can you give us dear readers more info re: why you think that this particular disclaimer would not protect the client?

  3. conrad erb says:

    dave – can you give us dear readers more info re: why you think that this particular disclaimer would not protect the client?

  4. Dave Hoffman says:

    Safe harbors are (in my view obviously) unavailable when the cautionary language is part and parcel of the scheme to deceive.

  5. Jon says:

    I’m not trying to point out a typo, but it is really funny if the disclaimer was gramattically incorrect…see below:

    ‘Many of these companies are on the verge of bankruptcy. You can lose all your money “buy” investing in this stock.’

    Shouldn’t it be “by”? Looks like the boiler room hack’s lawyer didn’t earn his keep.