Risk & Compliance

SEC Opens Probe of a Fake News Release

A fabricated announcement leads to a surge in a small firm's stock price, an investigation by the Securities and Exchange Commission, and a denial ...
Stephen TaubDecember 22, 2006

The Securities and Exchange Commission has launched an investigation into a seemingly bogus press release that led to a rapid surge in a small outsourcing company’s stock price, according to the Associated Press.

Early Wednesday, United Business Media’s PR Newswire distributed a news release stating that Duluth, Ga.-based Innotrac Corp. had won a multiyear, multimillion-dollar customer service and technical support agreement with Siemens IC Mobile, the European conglomerate.

Around the same time, Innotrac’s Nasdaq-traded stock increased by more than 100 percent, to $5.64 per share, until the company announced it had not issued the release, according to the AP.

Later that morning, Innotrac fired off a press release saying that the announcement purportedly made on its behalf at 8:31 a.m. regarding an agreement with a Siemens entity “was not authorized by the company and is totally untrue.” Innotrac added that it is investigating the source of the press release and does not believe it was from within the company.

According to the AP, PR Newswire obtained the phony press release from EReleases, an agency that distributes press releases on behalf of small companies that don’t have their own media relations departments.

Chief operating officer Dave Armon said the SEC has started looking into the matter, although the regulator would not confirm the investigation to the AP. Mickie Kennedy, founder of EReleases, told the news service that his company is “cooperating fully” with the SEC and Innotrac. PR Newswire has temporarily stopped accepting releases on behalf of publicly listed companies from EReleases.

In 2005, Innotrac, which provides order processing, fulfillment, and customer care services to businesses, reported a small loss on nearly $74 million in revenue. Its current market cap is about $28 million. According to the AP, nearly 80 percent of the company’s shares are owned by either chairman Scott Dorfman or an institutional shareholder whose assets are frozen because the SEC has accused it of defrauding investors.