Legal

from Meadowlands Magazine: May 2021

Advocacy & Public Affairs

Investment Fraud Alert

Be wary of ‘opportunities’ found via social media

Amid the COVID-19 pandemic, social media is an increasingly common means of communication. While sites like Twitter and Facebook can help us stay connected to friends and keep up with current events, social media platforms can also be used to spread misinformation and conduct outright fraud. Accordingly, investors should be wary when using information from social media to inform their investment decisions.

According to the Securities and Exchange Commission (SEC), it has experienced a significant uptick in tips, complaints and referrals involving investment scams in recent months. Social media is an attractive medium for fraudsters because they can reach large numbers of people with minimum effort and at a relatively low cost.

SEC enforcement action involving false stock tweets

Earlier this year, the SEC brought fraud charges against a California-based trader who used social media to spread false information about a defunct company, while secretly profiting by selling stock he owned in the company. According to the SEC’s complaint, Andrew Fassari published numerous false and misleading posts on social media platforms about Arcis Resources Corporation (ARCS), a publicly-traded company that has been defunct since at least 2016. At the same time, he was covertly trading the securities of ARCS in violation of federal securities laws.

The SEC alleges that Fassari purchased tens of millions of shares of ARCS, then deceptively spread false information about the company’s purportedly revived operations and imminent positive announcements on Twitter, among other social media platforms. Fassari uses the Twitter “handle” @OCMillionaire and uses similar usernames on other social media sites. The @OCMillionaire profile joined Twitter in July 2013, lists “13.1K” followers, includes a picture of a black Ferrari, and states, in part: “Master short squeeze artist. #Pennystock Wizard.”

The SEC’s complaint further alleges that, between December 9 and 21, 2020, Fassari made approximately 120 tweets that referenced “$ARCS,” dozens of which were false and misleading. For example, he tweeted, “$ARCS 380,000 indoor cultivation 1 Million+ sq ft processing. WEEEEEEEEE This CEO has big plans for us” and “a ton of news coming and backed by huge investors for its #cannabis operation[.]” Over the next several days, ARCS’s share price skyrocketed, ultimately increasing over 4,000%. On December 10, 14 and 16, 2020, Fassari sold all of his shares in ARCS for profits over $929,000, all while continuing to publish false and misleading information about ARCS and about his trading in ARCS.

The SEC’s complaint charges Fassari with violating the antifraud provisions of the federal securities laws and seeks a permanent injunction, disgorgement, pre-

judgment interest, and a civil penalty from Fassari. The SEC also issued an order temporarily suspending trading in the securities of ARCS.

“We allege that Fassari profited by using social media to deceive investors,” Melissa R. Hodgman, Acting Director of the SEC’s Division of Enforcement, said in a press statement. “The SEC is committed to protecting investors by proactively monitoring suspicious trading activity tied to social media, and by charging those who use social media to violate the federal securities laws.”

Tips to protect yourself from investment fraud

The SEC’s latest enforcement action represents just one form of social media investment fraud. According to the SEC, fraudsters will commonly use social media to spread stock rumors and manipulate the market to their advantage. In other cases, scammers will impersonate an established source of market information by setting up an account name, profile, or handle designed to spoof a particular company or securities research firm. They may even use the company’s logo, website information or employee names to make the social media account appear legitimate.

To avoid falling victim to fraud, it is imperative to always identify the true source of the investment information in your news feed. Below are several specific red flags to watch out for:

Limited history of posts: Fraudsters often create new accounts in order to perpetrate their scam without revealing their true identities. Therefore, information from social media accounts that lack a history of prior postings or sending messages should be viewed with skepticism.

Pressure to act “right now”: Investors should not trust messages that claim you will “miss out” if you don’t buy or sell stock quickly. Take the time to do your own research before engaging in any financial transaction.

Unsolicited investment information

or offers: Be extremely wary of social media posts on your wall, tweets, direct messages, e-mails or other communications that solicit an investment or provide information about a particular stock if you do not personally know the sender. While the person may appear to be a representative of a reputable company or be a member of your larger social circle, it may also be a facade.

Unlicensed sellers: Fraudulent investment schemes often involve unlicensed individuals or unregistered firms. To verify a promoter’s license and registration status, you can check the SEC’s Investment Adviser Public Disclosure (IAPD) website or the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck website.

Dan Brecher is Chair of the Securities and Investment Banking Group at Scarinci & Hollenbeck, LLC. His experience ranges from general counsel of New York Stock Exchange and NASD/FINRA member brokerage firms to representation of companies in hundreds of public and private securities offerings and advising institutional and high net worth investors. If you have any questions, please contact Dan Brecher at (201) 896-4100 or visit: scarincihollenbeck.com

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