The new rapid SEC
Mary Schapiro has not got great press amongst financial bloggers – however this time she beat me to the punch.
Emergent Health Corp was a heavily promoted pink-sheets biotech which (fraudulently) claimed to have a pill (yes a simple oral pill) that would stimulate the production of stem cells in adults and hence cure everything from paraplegia to heart disease to leukaemia. Here is just one of their press releases:
Emergent Health Corp. (Other OTC:EMGE.PK - News), a diversified holding corporation focused on the biotechnology sector, announces the Company has received approval from the U.S. Patent and Trademark office for their adult stem cell nutrition product Neuvitale(tm) Life Support.
An Emergent spokesperson commented, ``The Company is pleased to announce a license to market a formulation with ability to increase adult stem cells naturally from a person's own bone marrow has been allowed by the U.S. Patent and Trademark office. Now that this patent has been allowed, Emergent will seek further corporate and joint venture opportunities with firms capable of assisting entry into this untapped estimated Multi-Billion dollar market currently dominated by drugs with high costs.''
By 2004 the world market for Colony Stimulating Factor products, Neulasta(r) and Neupogen(r) marketed by Amgen was valued at $3.6 billion, a growth of 11% over 2003. That market has grown at an average annual growth rate of 16% over the previous 5 years. This is cited only as a market size barometer.
In addition to this product, the Company is actively exploring additional investment projects involved in the adult, umbilical cord, and embryonic stem cell sector to add to its growing portfolio of biotechnology ventures.
On these press releases the stock popped rising from about $1 to about $4.
The claims were outrageous of course – but you can still buy their products online. Some of their online adverts make equally outrageous scientific claims. Others – like this YouTube video – have a disclaimer at the end.
I tried for the last few days trying to find a borrow – any borrow in the stock. [You need to borrow the stock so you can short sell it.] Apparently there was a borrow on Monday but I was on holiday – and so I never managed to short the stock. [I was planning to donate the profits to charity.]
After that I was going to write a letter to both the Food and Drug Administration and the Securities and Exchange Commission and see which organisation shut this fraud down first. It was going to be an uncontrolled experiment to see if the SEC could live up to Mary Schapiro’s promise to be more responsive.
Alas – and this is good news for America and bad news for my favourite charity – the SEC acted fast on this one. They just suspended the shares in EMGE.
Whilst Mary Cox Schapiro is dragging her feet on a much bigger fraud I have shown her I got to give credit on this one. The SEC did this quicker than they ever would under Mr Cox’s stewardship failed regime.
The SEC has only civil powers. EMGE rises to the level of criminal fraud. This improvement means nothing if the prosecutor can’t back up. And therein lies the next set of problems.
Read more at John Hempton's Weblog
Interesting. What about the investors who made money on the run up to $4...If they sold before the suspension, they get away clean?
September 30, 2009 8:03 PM | Reply | Permalink
The real game here is that the stock was about 80 percent owned by insiders at a guess.
The insiders probably sold $5-10 million in shares.
Those shares would normally be worthless - but they were pumped.
The $5-10 million they won - they were losses to someone else.
Any speculator that was lucky to buy it on the way to $4 and to sell it - they were also winners.
Anyone who could get a short sale done (alas not me) they were also winners.
The losers were the people who purchased it on the pump.
There were plenty of them.
There are few easier ways to steal ten million dollars than via stock fraud. Its a crime that is usually unpunished.
At the moment all we have is a stock suspension. My guess is that the malefactors get away with this one too.
J
September 30, 2009 9:00 PM | Reply | Permalink
John:
Their getting away with it will only encourage them and others to try, try again.
.
October 1, 2009 9:50 AM | Reply | Permalink
Thanks for the reply, and the clarification.
This does seem like a simple scam, with very little consequences. Any brief scan of speculative stocks reveals all sorts of pumps and dumps that leave regular folks holding the bag.
Ugh.
October 1, 2009 11:39 AM | Reply | Permalink
Its exactly that - a simple effective scam with very little consequences except for the people who put $5000 in at the advice of a cold-call broker or a fradulent stock tipping sheet or the like.
My blog used to have Google adverts on them. I removed them after finding penny stock bloggers advertising on them.
I have found frauds advertising on the website of the New York Post with monotonous regularity. The margins for theft are mouth-watering.
Short sellers (and I am one) are not doing something particularly ethical - but they are reducing the margins of the scamsters - which reduces their incentives... and that is a good thing.
J
October 1, 2009 6:47 PM | Reply | Permalink