5 Red Flags For Pandemic-Related Investment Scams

By Alan Rosca
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Law360 (November 19, 2020, 4:36 PM EST) --
Alan Rosca
Alan Rosca
The last thing thousands of Americans concerned about the coronavirus were looking for this summer as they dealt with the risk of infection, sick relatives, job loss or the possibility of losing their home, was to fall victim to COVID-19-related scams. Yet the highest at-risk category for COVID-19 infections — senior citizens — is also among the highest at-risk groups for coronavirus-related scams.

It is a shocking statistic that as of mid-September, Americans have lost an estimated $145 million to coronavirus scams, according to data from the Federal Trade Commission.[1] The scams continue, with no end in sight. 

While the amount stolen from victims over the course of only a few months is stunning, the fact that such scams sprung up during a national emergency is hardly surprising. Given that the majority of scammers target groups when they are at their most vulnerable, and thanks to the rise of COVID-19 across the U.S., the number of people at risk has grown.

Unfortunately, it appears that senior Americans have once again been a primary target of scammers who have sprung up throughout the country and have targeted victims from all walks of life. Their sophistication has been increasing, putting potential victims at increasingly serious risks of losing substantial amounts of money to investment fraud related to COVID-19.

Coronavirus Investment Opportunities Worth Socially Distancing From

Scammers seeking to profit from the current pandemic are often targeting inexperienced investors for potentially substantial payouts.

A typical scam is for a fraudster to contact prospective investors about a supposed company with a product or service in the pipeline that will be in high demand during because of the pandemic, but that needs additional capital to bring that product or service to the marketplace.

Investment fraudsters and disreputable promoters often go to great extents to create bogus websites featuring what appears to be a legitimate business, and will often prepare shiny, professionally looking reports or brochures for that supposed company.

They may also distribute to prospective victims falsified research reports stating that the company's product or service could help prevent, track, or cure COVID-19 — or all of the above — and that the company's share price is about to skyrocket once it takes that product or service to the market.

An example of promoters accused by regulators of misleading investors by making false COVID-19-related claims came out on Sept., 25, when the U.S. Securities and Exchange Commission charged Mark Schena, president and chief science officer at Arrayit Corp., for making allegedly false and misleading statements concerning Arrayit's development of a COVID-19 blood test.[2]

According to the commission's complaint, Schena claimed back in March and April that Arrayit had created a blood test for COVID-19. In actuality, Arrayit had not purchased material needed to make a test, the commission's complaint stated. He had also told investors that the company was up to date on periodic filing when it was not, the commission stated.

"We allege that Mark Schena took advantage of the COVID-19 pandemic at the expense of investors," said Erin E. Schneider, director of the SEC's San Francisco Regional Office. "A pandemic does not exempt public company executives from their responsibility to make accurate disclosures."

In another related case, the SEC came down on Jason C. Nielsen, a penny stock trader from Santa Cruz, California.[3] Nielsen allegedly tried to drive the price up of Arrayit by making false claims online, including about the COVID-19 blood test, without disclosing to investors that he owned a large quantity of Arrayit stock, or of his intention of selling that stock as the price rose.

The SEC estimates Nielsen made $167,000 in six weeks. He would have profited even more but, on April 3, the SEC suspended trading Arrayit stock.

The SEC also came down on the Praxsyn Corp. for misleading statements related to COVID-19 products.[4] In March and April of this year, there was great anxiety among states about getting personal protective equipment for its frontline workers. If a company could produce a large number of N95 masks, there would be a healthy profit for its investors.

Praxsyn issued two press releases, one in February and another in March, saying it had access to millions of N95 masks. Its CEO, Frank J. Brady, was quoted as saying they would accept minimum orders of 100,000 masks. This gave hope to lots of places suffering from lack of proper protection. However, Praxsyn never had a single mask in its inventory and had no orders with any manufacturers to make masks, according to the commission's action.

Improper or fraudulent claims about products or services related to COVID-19 offered by publicly traded companies may amount to market manipulation or pump-and-dump campaigns orchestrated by unscrupulous promoters who, unbeknownst to the public, may be planning to sell their own holdings in the same companies once the stock price surges based on such false claims.

Indeed, concerns about market manipulation and pump-and-dump schemes prompted the SEC to issue trading suspensions this year involving nearly 40 publicly-traded companies.[5]

Other promoters have tried to recruit prospective victims to invest in private businesses that supposedly had a valuable COVID-19-related product of service nearly ready for the marketplace, if they could only raise a little more money from investors.

In a California case, Keith Lawrence Middlebrook, a 52-year-old from Huntington Beach, stands accused of contacting investors from around to the country and claiming to have pills that prevented the COVID-19 virus, as well as an injectable cure for this who already had the virus.

One of the people he solicited to invest turned out to be an undercover FBI agent. On June 17, Middlebrook was indicted on 11 counts of wire fraud.[6]

To entice investors, Middlebrook allegedly claimed a businessman in Dubai had offered him $10 billion for his company. He also said his cure for the virus was patent pending, and that former basketball star Magic Johnson was on his board of directors, but there is no evidence Johnson had any involvement with Middlebrook. The case is currently pending.

Staying Safe and Avoiding Scams

When it comes to COVID-19, unscrupulous promoters or fraudsters have tried to turn a quick profit with little concern for their victims. 2020 has been an uncertain year, and the uncertainty continues unabated. While the chances of Americans becoming a victim of fraud may have increased during this challenging time, there are some basic steps anyone can take to protect their finances.

If approached to invest in a COVID-19-related opportunity, investors should start by exercising common sense. Healthy skepticism and due diligence are always a good way to approach such an opportunity.

1. Unknown Companies Claiming a COVID-19 Cure

There is no publicly announced cure for COVID-19 and no approved vaccine in this country as of the date of this article. While some vaccines look likely to be approved soon, those are created by well-established companies with household names and have been widely reported in the mainstream media. A previously unknown company that claims to have a cure or vaccine, but does not show up in searches of reports in the mainstream media should present a bright red flag to a potential investor.

2. Cold Calls and Pressure to Make a Fast Decision

Established companies raise money through established channels, and always use licensed professionals to do so. They will not cold-call people at home to ask them for money, or try and get them to commit to invest before seeing any paperwork. If contacted by a stranger, resist pressure: Do not allow anyone to talk you into making a rushed financial decision.

3. Risk-Free Investments

There is no such thing as a risk-free investment — ever. This is even truer amid a national emergency that has no precedent in the modern world and creates enormous uncertainty in the marketplace. If a promoter or salesman assures you that the proposed investment is a safe bet or good as cash, walk away no matter how enticing their sales pitch.

4. Business Models You Don't Understand

An informed investor is a smart investor. Avoid investing in companies whose products or business model you do not fully understand. Before investing, do your research. Check the company, the product or service they offer, their market and — critically — the background of the promoter or salesperson who approached you about that investment opportunity.

5. Investments That Bypass Your Team of Advisers

Do not hesitate to seek professional help before entrusting your hard-earned life savings to strangers. Investors should talk to their trusted financial advisers or stockbrokers and evaluate any such investment opportunities. A certified public accountant might need to be involved to evaluate financial statements, and a lawyer to evaluate any investment-related paperwork.

Conclusion

The SEC saw the opportunity for ill-gotten gains early in the COVID-19 outbreak. On Feb. 4, back before the full force of the virus had been felt, the SEC issued a warning on its Investor.org website:

Fraudsters often use the latest news developments to lure investors into scams. We have become aware of a number of Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus, and that the stock of these companies will dramatically increase in value as a result. The promotions often take the form of so-called "research reports" and make predictions of a specific "target price." We urge investors to be wary of these promotions, and to be aware of the substantial potential for fraud at this time.

Be cautious of claims that a company's products or services can help stop the coronavirus, especially claims that involve microcap stocks. These claims may be made as part of fraudulent pump-and-dump schemes.

You may lose significant amounts of money if you invest in a company that makes inaccurate or unreliable claims. You may not be able to sell your shares if trading in the company is suspended.[7]

Investment fraud often boils down to a breach of trust and confidence. That is why scammers are also called con men. Before entrusting anyone with their hard-earned life savings, investors should remember the old saying: If it sounds too good to be true, it probably is.

Correction: A previous version of this article misspelled Jason C. Nielsen's last name. The error has been corrected.



Alan Rosca is a partner at Goldman Scarlato & Penny PC and an adjunct professor at Cleveland-Marshall College of Law.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] FTC Interactive Dashboards, Covid-19 and Stimulus Complains. https://www.ftc.gov/enforcement/data-visualizations/explore-data.

[2] Securities and Exchange Commission press release, Sept, 25, 2020: SEC v. Arrayit Corporation https://www.sec.gov/news/press-release/2020-224.

[3] Securities & Exchange Commission press release, June 9, 2020: SEC v. Nielsen https://www.sec.gov/news/press-release/2020-128.

[4] Securities and Exchange Commission press release, April 28, 2020: SEC v. Praxsyn & Frank J. Brady https://www.sec.gov/litigation/litreleases/2020/lr24807.htm.

[5] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/look-out.

[6] Orange County Breeze, June 17, 2020: Man indicted in investment fraud scheme centering on bogus claims of COVID-19 cure, http://www.oc-breeze.com/2020/06/17/183475_man-indicted-in-investment-fraud-scheme-centering-on-bogus-claims-of-covid-19-cure/.

[7] SEC's Office of Investor Education and Advocacy Investor Alert, February 4, 2020 (updated Sept. 28) https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/look-out.

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

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