Analysis

COVID-19 Securities Catch-Up: SEC Enforcement

By Dean Seal
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Law360 (June 1, 2020, 8:12 PM EDT) -- Ask the U.S. Securities and Exchange Commission, or indeed most anyone working in the securities industry, and they'll tell you that crises like the COVID-19 pandemic tend to be breeding grounds for fraudsters who aim to capitalize on volatile markets and uncertain investors — and "certainly in the microcap space," according to Andrew Calamari, a former director of the SEC's regional office in New York who now practices at Finn Dixon & Herling LLP.

As the pandemic pushes into the summer, Law360 is taking a look at the three enforcement actions and dozens of trading suspensions the SEC has issued in connection with the novel coronavirus since it captured the public consciousness earlier this year.

30 Trading Suspensions

The agency started launching enforcement actions in just the last month or so, but began targeting potential related frauds via its trading suspension powers back in February. Calamari told Law360 he thought the SEC has been "very aggressive in bringing trading suspensions in a very timely way" — it's issued 30 in just the last four months.

Federal securities laws permit the regulator to suspend trading for any stock for up to 10 business days if it deems it in the public interest to do so, 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.

Before the virus had gained a foothold in the U.S., the SEC issued its first suspension 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 and saw an immediate spike, though its share price has since gone back to pre-spike levels and flattened.

Another suspension came 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 that 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 last month.

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 has seen its share price double this year as the coronavirus pandemic sends businesses flocking to its 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 the same day as ZOOM, and kicked off a longer spate of suspensions aimed at the stocks trading on an OTC market that 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.

While April saw the highest number of suspensions by far, they continued into May. Most recently, the regulator targeted Micron Waste Technologies Inc. with questions about its claim to have acquired Covid Technologies Inc. and the acquisition's ability to manufacture "personal protective equipment to meet the needs of the global medical community during the COVID-19 pandemic," according to a May 26 order.

SEC v. Praxsyn

After weeks of halting trading, the SEC launched its first enforcement action connected to the pandemic on April 28.

Praxsyn Corp. was among those that had trading in its stock suspended by the SEC, but the regulator took another swipe at the microcap company in a lawsuit claiming it had "blatantly" lied about being able to provide buyers with N95 respirators.

Praxsyn said in a Feb. 27 news release that it was "negotiating the sale of millions of" N95 masks and was at the point of evaluating orders and vetting suppliers so that it could "guarantee a supply chain" for the in-demand gear.

But according to the SEC, internal Praxsyn emails reveal those statements were untrue — by the point of the announcement, only two buyers had reached out with preliminary general inquiries about buying masks, and no concrete commitments had been reached with suppliers.

Praxsyn has yet to publicly respond.

Eric I. Bustillo, the director of the SEC's Miami Regional Office, said in a statement on the day the suit was filed that "in the midst of the ongoing COVID-19 pandemic, Praxsyn and [its chief executive] sought to exploit unsuspecting investors by issuing false and misleading press releases concerning Praxsyn's ability to source and supply N95 masks for the COVID-19 virus."

The company has not publicly responded to the complaint.

The case is SEC v. Praxsyn Corp. et al., case number 9:20-cv-80706, in the U.S. District Court for the Southern District of Florida.

SEC v. Turbo Global

On May 14, the SEC launched two more enforcement actions against companies for which it had suspended trading, starting with a suit against Turbo Global Partners Inc. in Florida federal court for allegedly touting a "public-private partnership" with government entities in which it would be the exclusive distributor of thermal scanning equipment designed to detect fevers, one of the early warning signs of coronavirus infection.

According to the agency, no such agreement existed with either the government or the purported manufacturer of the equipment. Turbo Global and its CEO, accused by the regulator of being a "recidivist securities violator," have yet to respond.

The case is SEC v. Turbo Global Partners Inc. et al., case number 8:20-cv-01120, in the U.S. District Court for the Middle District of Florida.

SEC v. Applied BioSciences

On the same day as the Turbo Global action, the SEC filed claims in New York federal court accusing Applied BioSciences Corp. of "seeking to exploit the COVID-19 pandemic for profit" by "dramatically" shifting its focus from cannabinoid therapeutic products to coronavirus-related products in March.

The complaint took aim at a series of allegedly misleading news releases in which the biotech company claimed it could start offering home COVID-19 testing kits to the general public.

In reality, the finger-prick tests had not yet been shipped, were not meant to be used at home as advertised and were not approved by the U.S. Food and Drug Administration, the SEC said.

"In fact, [Applied BioSciences] had simply entered into an agreement to purchase test kits from the Essential Oil Company, a company that prior to the COVID-19 pandemic sold 'vitamin essential oil aromatherapy diffuser sticks[,]' and whose sole officer has a background in acting and modeling," the SEC said. The company has yet to respond to the allegations in court.

The case is SEC v. Applied BioSciences Corp., case number 1:20-cv-03729, in the U.S. District Court for the Southern District of New York.

Stephanie Avakian, co-director of the SEC's Division of Enforcement, said in a statement on the day the Turbo Global and Applied BioSciences complaints were filed that the agency was "actively monitoring the markets to detect potential fraudsters who seek to use the COVID-19 crisis as a basis for investment scams."

"As alleged in these complaints, Applied BioSciences and Turbo Global sought to take advantage of the COVID-19 crisis by misleading investors about their ability to provide solutions," Avakian said.

Calamari, the SEC New York office's director from 2012 to 2017, said the enforcement division "generally adapts pretty quickly" to the novel challenges of regulating markets in a crisis, the latest of which is "exactly the kind of circumstance that's going to cause people to try to offer securities and take advantage of the situation."

"I think this vigilance is good — it's what I would expect," Calamari said.

--Additional reporting by Reenat Sinay. Editing by Kelly Duncan.

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

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