The Securities & Exchange Commission sent a reassuring New Year’s message to investors yesterday – the Internet will not be a safe refuge for individuals engaged in fraudulent investment practices. In a January 5th press release announcing charges against one popular Internet "Investment Guru," SEC Enforcement Director Richard H. Walker declared that the Commission "will not tolerate fraudulent conduct or undisclosed conflicts of interest by those peddling investment advice on the Internet."
Walker’s comments accompanied an announcement that the SEC had filed an action in the United States District Court for the Northern District of Illinois, charging that Yun Soo Oh Park, popularly known as Tokyo Joe, had engaged in a scheme to defraud investors, including subscribers to his Internet stock recommendation service, by failing to disclose his own trading activities.
According to the SEC, Tokyo Joe’s Internet site offers investment recommendations to clients who pay fees of $100 to $200 a month to his company, Tokyo Joe’s Societe Anonyme Corp. In exchange for those payments, subscribers receive Tokyo Joe’s stock picks and prognostications on his web site, through e-mail, and in a real time chat room.
Unfortunately, according to the SEC Complaint, those subscribers don’t get all of the information they need, or to which they are entitled. Specifically, the SEC alleges that investors have been kept in the dark about Park’s personal investment activities. As the Complaint explains, Park regularly buys shares of a stock before recommending it to Societe Anonyme’s clients, and then "pumps up" interest in the stock by sending messages to clients that describe his picks as a "sure thing" or predict that it will "double" in value. Societe Anonyme members then purchase shares, driving the price and volume upward. As prices increase, Park quickly sells his shares, sometimes entering sell limit orders within minutes after making his recommendations. Park may tell his clients what to buy, but he keeps his own activities secret, failing to adequately disclose his prior ownership of a recommended stock or his intent to sell shares while simultaneously recommending their purchase.
The SEC further charges that Park attracts new followers by posting numerous testimonials and false performance data on his website. Apparently, on at least one occasion, Park also failed to disclose that he indirectly received compensation from the issuer of a stock he recommended.
The SEC is seeking a permanent injunction against Park and Societe Anonyme, as well as disgorgement of unlawful profits.
In announcing the Complaint, Richard H. Walker recognized the "rapid growth of websites run by self-proclaimed investment gurus." The standards that govern the conduct of those individuals, however, should be no less stringent than those applied to analysts whose opinions are distributed by more traditional, less hi-tech, means. That was precisely the point made by SEC Midwest Regional Director Mary Keefe, who also commented on the charges filed against Park in her region. "Whether on the Internet or otherwise," she explained, "those who counsel others to buy and sell securities have the responsibility to speak truthfully and fairly disclose to their clients the financial benefits they reap from their advice."
Investors should take comfort while investment gurus take heed – it would appear that the SEC intends to take that responsibility seriously.
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