I soon learned that arguing with the DOJ is as pointless as arguing with the SEC. I recall one conversation around a 33-page research report I wrote for Zacks in February 2014. It was an outstanding report. It was 17,600 words and the only thing wrong with the report was one line in the disclaimer on page 33 that ruined the whole thing. It said I did not own any shares in the subject company. That wasn't true; I did own shares. I did the research and I liked the name, so I bought the stock consistent with my Buy recommendation. It was 33 pages of honest, hard, quality work and the DOJ viewed as a scheme to fraud.
Back in October 2006, Former FDA Commissioner Lester Crawford pleaded guilty to conflict of interest and falsely reporting that he did not own stock in food, beverage, and medical device companies he was in charge of regulating. Crawford earned nearly $42,000 from illegally held shares while at FDA. Nearly $29,000 of that came from exercising stock options in Embrex Inc., where he had served as a director, while the company was under FDA regulation. He and his wife also owned shares in Pepsico Inc., Sysco Corp., Kimberly-Clark Corp. and Wal-Mart Stores Inc., all of which the government deemed "significantly regulated" by the FDA. Crawford received three years of supervised probation and a fine of about $90,000. It was barely a slap on the wrist for Crawford. A few months later, he joined the Board of Bexion Pharmaceuticals.
Earlier this year, the SEC fined Elon Musk $20 million, less than 0.1% of his net worth, as a punishment for his "false and misleading" Tweet claiming he had the funding to take Telsa public at significantly higher prices than the current market price at the time. The fine settled securities fraud charges by the SEC, which is exactly what they charged me with, only Musk, despite paying a fine 67X the amount I paid, was never charged by the DOJ. Musk later stated publicly that he, "Doesn't respect the SEC... but respects the justice system."
Significantly bigger fish than I paid fines and moved on with their lives. That's despite the fact that I was clearly not a big fish. I had a modest portfolio and my average profit on a trade was around $1,000. The DOJ noted in their sentencing memo that I purposefully traded small amounts, "to avoid detection," as this was, "less likely to draw attention" of regulators. That was not true. I traded small because my portfolio was small (less than half-a-million). It's amazing to me the sketchy things I see through my job on a daily basis. The "Guy" manipulating penny-stocks in the Bahamas, or the publicly traded biopharma company that also runs an investment bank.
Recently, a group of well-known biotech executives, including John O’Rourke, Phillip Frost, Robert Ladd, and Barry Honig settled with the SEC after making $27 million on an elaborate penny-stock scheme. Phillip Frost paid a $5.5 million fine for his involvement in the fraud. No criminal charges were filed despite the clear facts of the case that this was an obvious pump-and-dump scam. Then there was the curious case of Gregory Lemelson, a Massachusetts-based Hedge Fund manager / Greek Orthodox priest (yeah, an odd combination) charged with running fraudulent scheme by publicly disseminating a series of false statements about Ligand Pharmaceuticals through research reports and interviews, netting profits of $1.3 million. Again, no criminal charges despite the fact that Lemelsen made nearly 10x what I made and willingly mislead investors to get it done. This is the kind of stuff that happens on a daily basis. There is a constant leakage of information around financings and investment banks manipulate bid-ask spreads on penny-stocks seemingly at will. These seem bigger fish, but the government wants easy.
I'm far from an expert on every biopharma stock, but I can generally read articles on websites like Seeking Alpha and distinguish between quality work and total garbage. Most of the work on Seeking Alpha is garbage. It's designed to pump up a stock so the author could sell into the hype the article created. It's called a "Pump and Dump", and it's illegal. But these scams are exceedingly hard for the SEC to prosecute if the author discloses his/her position. Being overly optimistic or writing hyperbole is not illegal. It's not illegal to slap a $200 price target on a $5 stock. It's stupid and misleading, but not illegal.
Accordingly, it is not illegal to write 2,000 words of complete and utter sensationalized garbage as long as the disclosure is correct. I see it all the time. That's the majority of the content on Seeking Alpha. I loath authors that write pump and dump or hit-piece articles. It ends up hurting the average investor. I didn't do that. I wrote 2,000 words (or oftentimes, far more) of fair, honest, high-quality work, and then failed to disclose my position at the end. I rationalized, I justified, I was blind. It was all so stupid.
It took eight months, but eventually, the DOJ charged the case. There's a saying that, "The wheels of justice turn slowly, but grind exceedingly fine." It's true; but, the one thing you have to understand about our justice system is that the wheel turns slowly on purpose. The SEC and DOJ have enormous budgets to investigate and prosecute. They know people eventually exhaust their will and/or ability to fight. Over 98% of the cases federal prosecutors charge end up in a guilty plea. No trial, just a defendant scummed to the will of the criminal justice system and the weight of the consequences that ensue if you fight. They were threatening me with 18 months in prison!
Like myself, defendants all-to-often end up resigning to the fact that it is just easier to give up, knowing after they do the government will move on to some other poor shmuck. It's a problem that John Oliver covers beautifully in this Last Week Tonight video.
In September 2017, I was formally charged with securities fraud. Being labeled as a fraud is something that really stings. A month later, I stood in front of a federal judge in Chicago and plead guilty. There was never any doubt I would plead guilty. I was guilty. Mens rea aside, I did what they said I did. I had been called a number of things in my life: student, Research Scientist, Vice President, Managing Director, Chartered Financial Analyst, Cub Scout Chairman, Lion, coach, mentor, quarterback, captain, junior Olympian, husband, and father, to name a few. In October 2017, I added convicted felon to that list.
Back in October 2006, Former FDA Commissioner Lester Crawford pleaded guilty to conflict of interest and falsely reporting that he did not own stock in food, beverage, and medical device companies he was in charge of regulating. Crawford earned nearly $42,000 from illegally held shares while at FDA. Nearly $29,000 of that came from exercising stock options in Embrex Inc., where he had served as a director, while the company was under FDA regulation. He and his wife also owned shares in Pepsico Inc., Sysco Corp., Kimberly-Clark Corp. and Wal-Mart Stores Inc., all of which the government deemed "significantly regulated" by the FDA. Crawford received three years of supervised probation and a fine of about $90,000. It was barely a slap on the wrist for Crawford. A few months later, he joined the Board of Bexion Pharmaceuticals.
Earlier this year, the SEC fined Elon Musk $20 million, less than 0.1% of his net worth, as a punishment for his "false and misleading" Tweet claiming he had the funding to take Telsa public at significantly higher prices than the current market price at the time. The fine settled securities fraud charges by the SEC, which is exactly what they charged me with, only Musk, despite paying a fine 67X the amount I paid, was never charged by the DOJ. Musk later stated publicly that he, "Doesn't respect the SEC... but respects the justice system."
Significantly bigger fish than I paid fines and moved on with their lives. That's despite the fact that I was clearly not a big fish. I had a modest portfolio and my average profit on a trade was around $1,000. The DOJ noted in their sentencing memo that I purposefully traded small amounts, "to avoid detection," as this was, "less likely to draw attention" of regulators. That was not true. I traded small because my portfolio was small (less than half-a-million). It's amazing to me the sketchy things I see through my job on a daily basis. The "Guy" manipulating penny-stocks in the Bahamas, or the publicly traded biopharma company that also runs an investment bank.
Recently, a group of well-known biotech executives, including John O’Rourke, Phillip Frost, Robert Ladd, and Barry Honig settled with the SEC after making $27 million on an elaborate penny-stock scheme. Phillip Frost paid a $5.5 million fine for his involvement in the fraud. No criminal charges were filed despite the clear facts of the case that this was an obvious pump-and-dump scam. Then there was the curious case of Gregory Lemelson, a Massachusetts-based Hedge Fund manager / Greek Orthodox priest (yeah, an odd combination) charged with running fraudulent scheme by publicly disseminating a series of false statements about Ligand Pharmaceuticals through research reports and interviews, netting profits of $1.3 million. Again, no criminal charges despite the fact that Lemelsen made nearly 10x what I made and willingly mislead investors to get it done. This is the kind of stuff that happens on a daily basis. There is a constant leakage of information around financings and investment banks manipulate bid-ask spreads on penny-stocks seemingly at will. These seem bigger fish, but the government wants easy.
I'm far from an expert on every biopharma stock, but I can generally read articles on websites like Seeking Alpha and distinguish between quality work and total garbage. Most of the work on Seeking Alpha is garbage. It's designed to pump up a stock so the author could sell into the hype the article created. It's called a "Pump and Dump", and it's illegal. But these scams are exceedingly hard for the SEC to prosecute if the author discloses his/her position. Being overly optimistic or writing hyperbole is not illegal. It's not illegal to slap a $200 price target on a $5 stock. It's stupid and misleading, but not illegal.
Accordingly, it is not illegal to write 2,000 words of complete and utter sensationalized garbage as long as the disclosure is correct. I see it all the time. That's the majority of the content on Seeking Alpha. I loath authors that write pump and dump or hit-piece articles. It ends up hurting the average investor. I didn't do that. I wrote 2,000 words (or oftentimes, far more) of fair, honest, high-quality work, and then failed to disclose my position at the end. I rationalized, I justified, I was blind. It was all so stupid.
It took eight months, but eventually, the DOJ charged the case. There's a saying that, "The wheels of justice turn slowly, but grind exceedingly fine." It's true; but, the one thing you have to understand about our justice system is that the wheel turns slowly on purpose. The SEC and DOJ have enormous budgets to investigate and prosecute. They know people eventually exhaust their will and/or ability to fight. Over 98% of the cases federal prosecutors charge end up in a guilty plea. No trial, just a defendant scummed to the will of the criminal justice system and the weight of the consequences that ensue if you fight. They were threatening me with 18 months in prison!
Like myself, defendants all-to-often end up resigning to the fact that it is just easier to give up, knowing after they do the government will move on to some other poor shmuck. It's a problem that John Oliver covers beautifully in this Last Week Tonight video.
In September 2017, I was formally charged with securities fraud. Being labeled as a fraud is something that really stings. A month later, I stood in front of a federal judge in Chicago and plead guilty. There was never any doubt I would plead guilty. I was guilty. Mens rea aside, I did what they said I did. I had been called a number of things in my life: student, Research Scientist, Vice President, Managing Director, Chartered Financial Analyst, Cub Scout Chairman, Lion, coach, mentor, quarterback, captain, junior Olympian, husband, and father, to name a few. In October 2017, I added convicted felon to that list.
Frost is a crook. Hang in there Jason! You do great work!
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