SEC Has Cut Trading For 20 Stocks Over COVID-19 Concerns

By Dean Seal
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Law360 (April 20, 2020, 9:38 PM EDT) -- The U.S. Securities and Exchange Commission's enforcement division has suspended trading for 20 publicly traded stocks in connection with the COVID-19 pandemic so far, with an eye trained on the over-the-counter market.

Sixteen of those trading suspensions were ordered in April alone for penny stocks on the OTC market that were flagged by the SEC either due to unsubstantiated claims about the companies’ efforts to combat the pandemic or, in one case, concerns that the issuer’s stock would be confused for that of a different company booming in the wake of the crisis.

The SEC declined to comment specifically on its suspension activities when reached by Law360, but the agency has been effusive in its public statements about protecting investors as the coronavirus casts global financial markets into turmoil.

“The agency is actively monitoring our markets for frauds, illicit schemes and other misconduct affecting U.S. investors relating to COVID-19 and, as circumstances warrant, will issue trading suspensions and use enforcement tools as appropriate,” the SEC says in an investor bulletin on its website.

Federal securities laws permit the agency to suspend trading for any stock for up to 10 business days if it deems it in the public interest, typically citing a lack of updated or adequate information about the issuer, questions about the accuracy of the issuer’s public statements, and questionable trading activity for the security.

While most of the coronavirus-related suspensions have occurred in April, after the virus already gained a foothold in the U.S., the SEC issued its first back in early February for Aethlon Medical Inc., a medical technology company that saw its share price explode the month prior. The regulator said at the time it was concerned about claims from third-party promoters about the viability of a product to treat the coronavirus.

Trading in Aethlon’s stock resumed after the 10-day period was up and saw an immediate spike, though its share price has since gone back to pre-spike levels and flattened.

Another suspension came down later in February for Eastgate Biotech Corp. over information circulating earlier in the month regarding the company’s purported marketing rights to an approved treatment that could “potentially combat the Wuhan coronavirus.”

Unlike Aethlon’s shares, trading for Eastgate never resumed, though that’s unsurprising given the former is listed on the Nasdaq while Eastgate has traded for no more than $0.02 per share on over-the-counter markets for at least a year.

According to Tom Gorman, a Dorsey & Whitney LLP partner and former senior counsel for the SEC's enforcement division, getting an OTC stock back to trading after a suspension requires a market maker to put a bid for shares into the market after acquiring all the required financial information. Many market makers “may be reluctant to enter such a bid because it may result in a call from the SEC staff” asking if they’ve gotten that information, Gorman told Law360.

“The fact of the matter is, if they suspend trading in your stock, it’s probably not going to trade again,” Gorman said.

A month after the Eastgate suspension, the SEC issued another order, this time fearing a case of mistaken identity. The March 25 order took aim at Zoom Technologies Inc., a seemingly defunct company trading on an OTC market as ZOOM that saw its stock explode in the months prior — presumably, the SEC said, because investors were confusing it for the booming Zoom Video Communications.

The latter Zoom, a provider of video communication services, has seen its share price double this year as the coronavirus pandemic sends businesses flocking to telework solutions. In a tweet from the SEC on the morning that trading for ZOOM was suspended, the regulator said the suspended stock “is NOT the similarly named popular video communications company.”

Trading in another stock — a health care company that claimed it had made a large quantity of medical protective masks — was also suspended on the same day as ZOOM, marking the first two of 18 suspensions that the SEC has issued over the last month over concerns related to the COVID-19 pandemic.

Among them was for Prestige Capital Corp., a Utah-based emerging growth company that had its shares trading for well under $1 until a surge that has kept it above $1 per share since March 23.

Not unlike ZOOM, Prestige’s suspension was made over investor confusion, as the SEC order highlighted concerns with information about Prestige’s "operations, if any, in light of concerns about investors confusing this issuer with a similarly named private company that is a manufacturer of N95 masks and the subject of increased media attention during the ongoing COVID-19 pandemic."

The agency is presumably referring to Prestige Ameritech, a private company in Texas and the largest producer of surgical masks in the U.S.

Each of the other 15 stocks suspended in April over virus concerns were trading on an OTC market and had made claims, which the SEC deemed dubious, about involvement with the creation of a COVID-19 treatment, coronavirus testing kits, products that could protect against spread of the virus or some other business activity connected to the crisis.

The most recent suspension came down on April 16, when the SEC stopped trading for PreCheck Health Services Inc. based on March press releases touting orders to the company for COVID-19 tests for overseas customers.

The SEC does not announce when it is working on a suspension in case the agency’s suspicions are proven to be unfounded after getting in contact with the issuer, so it remains to be seen just how many more suspensions are in store for the OTC market and the U.S. financial market as a whole as the pandemic continues to upend daily life.

Gorman says a rash of trading suspensions connected to a single event or crisis has been seen before, noting the global financial crash that roiled markets in 2007 and 2008, but “is not typical and may not have occurred since the market crisis.”

“Off the top of my head, I can't think of anything quite this pervasive, because it's moving everything,” Gorman said.

--Editing by Philip Shea and Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.

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