Risk & Compliance

SEC Cracks Down on “Creative Writing”

The commission takes two actions against the use of bogus press releases.
Stephen TaubJanuary 30, 2008

The Securities and Exchange Commission announced Tuesday that it took action in two unrelated cases of companies using bogus press releases.

In one of the cases, the regulator accused Stinger Systems Inc. and company president Robert Gruder of making a series of material misrepresentations and omissions regarding Stinger’s flagship stun gun product. According to the complaint, from October 2004 through March 2005, the misrepresentations consisted of press releases and direct mailings to thousands of law enforcement officers and agencies, suggesting that Stinger was manufacturing, selling, and shipping its stun gun.

“In fact, the product was still in the development phase,” the SEC said.

The complaint also alleges that the misrepresentations consisted of statements on Stinger’s website and in industry publications indicating that Stinger’s stock was trading on NASDAQ, when in fact it was not.

The SEC also charges that Stinger and Gruder misrepresented that the Bureau of Alcohol, Tobacco, and Firearms (ATF) certified Stinger’s stun gun, even though the ATF offers no such certification. Gruder did not return calls from CFO.com.

These misrepresentations caused a spike in the trading volume and price for Stinger’s shares once it began publicly trading in November 2004, according to the commission. For example, on November 12, 2004, the first full day of trading, Stinger’s stock price rose by 340 percent, from $1.25 to $5.50. On the next trading day, after Stinger announced that it anticipated shipping its stun gun products in January 2005, the stock price increased by an additional 55 percent to $8.50. By November 17, 2004, the stock closed at $19.25.

The SEC is seeking permanent injunctions against future violations, the imposition of civil penalties, an order permanently prohibiting Gruder from acting as an officer or director of a publicly-traded company and an order barring him from participating in any offering of a penny stock.

In a similar case, announced on the same day, the SEC filed a civil injunctive action against Daryn Fleming, the former CEO and chief accounting officer of International Broadcasting Corp.(IBC), and Mathew Bruce, an agent of the company, alleging they violated the antifraud provisions of the federal securities laws. The SEC also announced it settled a civil injunctive action against International Broadcasting, which consented to the entry of a permanent injunction from violations of certain securities laws.

“Neither of them are settling, so we intend to litigate the matter in federal district court in Spokane, Wash,” Peter Chan, assistant regional director of the SEC’s Chicago office, told CFO.com.

The SEC alleged that International Broadcasting — now known as Copper King Mining Corp. — through Fleming issued false press releases about its business operations including nonexistent broadcast affiliations with various radio stations. The regulator said that when Bruce and Fleming were questioned by investors about these affiliations they made public misrepresentations live on an International Broadcasting internet radio show to conceal the fact that the original press releases were false.

Bruce and Fleming could not be reached for comment. Calls to IBC also were not returned.