How Was Avon's Phony $8.2 Billion Takeover Offer Overlooked by the SEC?

NEW YORK (TheStreet) -- Three years to the day after Coty (COTY) withdrew its $12 billion takeover bid for Avon (AVP), the iconic beauty-products company's stock surged on reports that it had attracted another suitor, this one a British private-equity firm willing to pay about three times its value.

The high was short-lived. The private-equity firm offering $8.2 billion apparently doesn't exist. Nor does the attorney who supposedly advised it. The source for all the misinformation: a filing with the Securities and Exchange Commission, the agency in charge of protecting investors large and small from stock market manipulation and malfeasance.

How could it happen?

While the agency has a variety of safeguards in place to prevent such an occurrence, history shows its oversight isn't foolproof. In the past three decades alone, fake takeover bids from an offer to buy retailer Dayton Hudson in 1987 to a purported purchase of Pan Am and Northwest Airlines in 1989 and a buyout of technology company Pairgain 10 years later have offered a chance for unscrupulous traders to profit from a brief run-up in a company's stock.

Just last year, the SEC filed a complaint in federal court in New York accusing Luis Chang and his Everbright Development Overseas of fabricating a $750 million takeover bid for Allied Nevada Gold (ANVGQ) to push up the value of their shares, then selling them at a gain of about $7 million.

In Avon's case, the faux deal pushed shares in the company known for door-to-door sales by neighborhood representatives to the highest intraday price since May 5. Trading was briefly halted, and the stock pared gains as news spread that the filing was fake.

The case highlights the vulnerability of global securities markets to electronic fraud, said Jerry Reisman, a partner in the firm of Reisman, Peirez, Reisman & Capobianco in Garden City, N.Y.

Computerized trading makes it possible for investors to react instantaneously to news -- or even the possibility of news -- which can mean big losses when reports turn out to be unfounded or fraudulent, Reisman said.

Without an international agreement outlawing such incidents and making culprits subject to extradition, "these are gyrations that are going to occur more and more often," he said. "Everybody gets hurt. The larger investor gets hurt for more money, and the smaller investor gets killed."

Shares of Avon jumped about 7% after the filing, which outlined a bid from PTG Capital Partners of $18.75 per share, a substantial premium to yesterday's closing price of $6.67. Calls to the firm, PTG Capital Partners, weren't answered. Avon said in a statement that it had received no such offer and hadn't even been able to confirm the existence of the firm.

Michael Trose, a contact identified in the filing as a Fort Worth, Texas, attorney, has no listing with the State Bar of Texas, which all the state's attorneys are required by law to join. His supposed employer, the Trose & Cox law firm, doesn't exist, according to Bloomberg.

The short-lived upswing for Avon interrupted a five-year decline in the New York-based company's stock, which has fallen 70% while the broad S&P 500 (SPY) has more than doubled. Avon's sales have fallen every year since a high of $11.3 billion in 2011, and its $388.6 million loss in 2014 marked the third straight year without it at least breaking even.

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