Fool's Gold: SEC Strikes Back


"Information is the investor's best tool in battling securities fraud."

Many investors are painfully aware of the securities fraud allegations that seem to consistently attract media attention and challenge legal teams, security regulators and forensic accountants. Some involve conspiracies, clandestine meetings as well as "smoke and mirror" accounting that can make for compelling revelations in the most noteworthy schemes. In the battle against securities fraud, information is the investor's best tool. While necessary for transparency, the headlines that grab the most attention in popular news read more like a spy novel than the SEC suspending trading temporarily.

Recent Manipulations

On June 18, the SEC won a default judgment permanently banning Penny Stocks Writer Bob Chapman for his role in the manipulation of Sedona Software Solutions. This case was originally launched on December 19, 2007, when the SEC filed a complaint describing how several men manipulated Sedona and SHEP Technologies Inc., grossing $5.8M selling shares of both. The companies were traded on the loosely regulated OTCBB in the U.S. and two clients of LOM (Holdings) Ltd. were implicated in the complaint and alleged to have made $6M in 2003 by selling restricted shares.

In a classic "pump and dump" stock scheme, Chapman's role in the incident was to create an "independent" research report on Sedona, which cited the company as "an incredible opportunity that could be the largest public offering in the U.S. for a mining company this year."

Key Takeaway

Securities fraud often consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on misrepresentations or inaccurate data. Unfortunately, the perpetrators rarely seem to face justice; and the multiple victims, including general capital markets, never have restitution fully paid. Often, many of the individuals involved continue to operate, suffering only minor consequences relative to the residual effects of mistrust and pain investors feel.

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