Securities Suits Hit Firms Allegedly Using Stock Promoters to Boost Share Price

Securities Suits Hit Firms Allegedly Using Stock Promoters to Boost Share Price

 On July 30, 2014, when a plaintiff shareholder filed a securities class action lawsuit against the company and certain of its directors and officers, Galectin Therapeutics became the latest company to be hit with a securities suit following press reports that the company had used a stock promotion firm to try to boost its share price. There have already been several other companies against whom securities lawsuit have been filed this year that are similarly alleged to have used stock promotion firms.

According to their July 30, 2014 press release (here), the plaintiff’s lawyers filed the lawsuit against Galectin in the District of Nevada after press reports that the company was using stock promoters “in a misleading brand awareness campaign aimed at boosting its stock price.” The complaint, which can be here, specifically refers to a July 28, 2014 article by Adam Feuerstein on TheStreet.com (here) which said that Emerging Growth Corp., through its parent company TDM Financial, a penny-stock promotions firm, was the investor relations and marketing company Galectin was paying for misleading promotional campaigns to entice investors to buy its stock.

Among other things, the stock promotion firm is alleged to have distributed press  release saying that Galectin was “nipping at [the] heels” of its competitors and “actually may be closer than what first appears with a Phase 1 trial because of the potential to treat fatty liver disease even once it has progressed.”  According to the complaint, Galectin’s share price fell 81% of news of the company’s use of the stock promotion firm.

The lawsuit against Galectin is merely the latest in series of suits that have been filed so far this year against companies alleged to have used stock promotion firms to try to boost their share price. Several of the firms that have been sued are alleged to have used a stock promotion firm known as The DreamTeam Group. 

The first of these DreamTeam related lawsuits was filed on March 5, 2014 against Galena Biopharma, as discussed here. The complaint (here) alleges that on February 12, 2014, an article on TheStreet.com  (here) claimed Galena was engaging in a misleading brand awareness campaign aimed at boosting its stock price. Additionally, the article stated that Galena paid investor relations firm The DreamTeam Group to publish articles under aliases promoting the Company’s stock without disclosing who paid for them. On this news, Galena’s stock price dropped 16%. Then, on February 14, 2014, Galena issued a letter to its shareholders acknowledging that the Company had engaged DreamTeam. On this news, Galena’s stock price dropped another 14%.

The Galena lawsuit was followed on March 14, 2014 by a lawsuit filed against CytRx Corporation in the Central District of California, as discussed here. The complaint alleges that the company employed the services of stock promotion firms DTG and MissionIR to create and distribute articles about the company which were published without any disclosure that they had been created by a promotional firm employed by the company. (DTG is The DreamTeam Group). The company’s share price declined after online reports about the company’s use of the promotional firm.

On March 22, 2014, shareholders filed yet another lawsuit against a company that allegedly used The DreamTeam Group’s services. As discussed here, the shareholders filed their lawsuit against InterCloud Systems and certain of its directors and officers in the District of New Jersey alleging that the company misrepresented or failed to disclose that it had hired  The DreamTeam Group to tout InterCloud stock without disclosing that it was paid by the Company to promote the stock. The complaint alleges that the promoter had posted misleading articles on behalf of the Company without disclosing its paid marketing relationship

In addition, on May 22, 2014, plaintiffs filed a lawsuit against Provectus Biopharmaceuticals and certain of its directors and officers in the Middle District of Tennessee, as discussed here. The complaint alleges that the defendants had misled investors about the prospects for its developmental stage skin cancer treatment. The complaint also quotes an article from Seeking Alpha in which the author alleged that the company had used a stock promotion firm called Small-Cap Street LLC, noting that the SEC had recently halted trading in several of the stocks that the firm had promoted.

Altogether That makes at least five securities class action lawsuit that have been filed this year against companies that allegedly used the services of various stock promotion firms, including three lawsuits against companies that allegedly used the services of The DreamTeam Group. Whatever the thought process is for companies using these kinds of firms to promote their companies, it is clear that news about the companies’ use of the firms can have a negative impact on the company’s stock (which obviously is counter to the idea of using the promotional firms in the first place). As the lawsuits above underscore, the alleged use of these firms can also result in securities class action litigation.

It is interesting that four of the five companies involved in these lawsuits are developmental stage biotech firms. The shares of these types of companies often languish as the companies work their way through the stages of the clinical trial process. On the other hand, the share prices can be very sensitive to key developments, either positive or negative. These conditions create a set of circumstances where it is may seem important to the companies to get their stories out, so that investors are aware of their companies’ bright prospects. There is of course nothing wrong with getting the story out, as long as the story is accurate. And as these cases show, as long as the story gets out in a forthright way, rather than allegedly through sponsored articles with undisclosed connections to paid stock promoters.

Back in the day when I was on the underwriting side, I would have duly noted the problems associated with companies’ use of these kinds of stock promotion firms, and I would have made it my business to find out if an applicant was using one of these firms and if so for what kinds of services. Just a thought.

Dark Pool Clients File Lawsuit Against Barclays: Last week when I wrote about the securities class action lawsuit that Barclays ADS holders had filed against the company based on the company’s alleged misrepresentations about its dark pool trading venue, I noted that I hadn’t seen any lawsuits filed by clients that had traded shares in the dark pool venue. However, it now looks as if some clients have now filed a lawsuit against Barclays.

As discussed in an August 1, 2014 Bloomberg article (here), late last week a client of Barclays sued the company alleging that the bank gave high-frequency traders unfair advantages in its operation of the dark pool. The identity of predatory traders and the volume of their trading in the dark pool allegedly was hidden from clients. The plaintiff filed the lawsuit on behalf of Barclays dark pool clients who used the pool starting in 2011. The complaint alleges concealment, unfair competition, and false advertising claims against Barclays for making false statements to and concealing material information from clients about its dark pool. A copy of the complaint can be found here.

The Latest Scandal-Driven Litigation Against Financial Services Companies: Let’s see … after the financial crisis, we had the Libor scandal, the foreign exchange trading scandal, the high frequency trading scandal and the dark pool trading scandal. Each one of these has led to its own set of follow-on civil lawsuits. As of all of there were not enough, we now have the silver futures manipulation scandal. And of course a follow-on lawsuit.

Earlier this year, there were several articles in the press raising questions about the way that gold and silver futures trading are set (refer for example here). The London Silver fix, which has been in place for 95 years and was participated in by a small number of banks, is now due for an overhaul as a result of the questions. In addition, on July 31, 2014, a plaintiff filed a class action lawsuit against the banks in the Eastern District of New York. The complaint, which can be found here, is filed against Deutsche Bank, HSBC, and the Bank of Nova Scotia, the members of the London Silver Market Fixing Limited. The complaint, which purports to be filed on behalf of everyone that transacted in silver futures since January 1, 2007, seeks damages for alleged violations of the Sherman Antitrust Act and the Commodity Exchange Act.

Another day, another scandal, another scandal=driven follow-on lawsuit against a group of financial institutions.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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