SEC Settles 'Pump-and-Dump' Case Against Law Student, Associates

The case signals that stock manipulation isn't just for the pros anymore.
Author:
Publish date:

A Washington, D.C., man Thursday settled

Securities and Exchange Commission

charges that he used a stock-recommendation Web site to manipulate the prices of four thinly traded stocks.

The agency said Douglas Colt generated more than $345,000 in profits for himself and his associates, four of whom also settled administrative cases brought by regulators stemming from the case. Colt consented, without admitting to or denying the allegations of the complaint, to a permanent injunction against securities fraud.

Experts say the case, the third Internet fraud case filed by the SEC in recent months, illustrates the risks of using stock information on the Internet, particularly the ease with which people can disseminate false information and spur movement in low-priced, thinly traded stocks. Regulators have said they'd crack down on such scams in an effort to maintain the integrity of data available to investors. And watchers of message board activity were surprised that the case involved seemingly ordinary people.

The SEC alleges Douglas Colt, a Georgetown University law student, created

Fast-Trades.com

, a now-defunct Web site with which he, in February and March 1999, manipulated four thinly traded stocks:

Apache Medical Systems

(AMSI)

,

Option Care

(OPTN) - Get Report

,

American Education

(AEDU)

and

Artecon

(which is now owned by

Dot Hill Systems

(HIL) - Get Report

). None of the companies was named as a defendant in the SEC action, and company representatives weren't immediately available for comment. Harry Weiss, Colt's lawyer, declined to comment on the case.

The SEC also sued Kenneth Terrell, Jason Wyckoff and Adam Altman, all current or former law students, and Colt's mother Joanne Colt for participating in the scheme. The SEC alleges that Terrell, Wyckoff, Altman and Douglas Colt "posted hundreds of false or misleading messages on Internet message boards," including

Yahoo! Finance

(YHOO)

and

Raging Bull

, in an attempt to draw subscribers to the Fast-Trades site and encourage them to purchase Fast-Trade selections, thus driving up share prices. According to the suit, they posted under multiple identities and did not reveal their connection with Fast-Trades. The defendants, without admitting or denying the allegations, consented to an order directing them to cease and desist from committing or causing violations of the antifraud provisions of the Securities Exchange Act of 1934. They didn't respond to requests for comment.

The case is the third high-profile Internet case filed by the SEC since December, when three California residents were charged with spreading false information on message boards and manipulating the price of a thinly traded stock. In January, "Tokyo Joe," an Internet daytrading guru, was

charged with "scalping," or encouraging people to buy certain stocks and then selling them as soon as the buying began. "We are aggressively attacking fraud on the Internet," says Richard Walker, director of the SEC's enforcement division. Congress recently earmarked an additional $7 million for Internet surveillance in 2000.

Thursday's case "is a warning sign," says A. Jared Silverman, a New Jersey attorney and former chief of the

New Jersey Bureau of Securities

. "It shows how relatively easy it is to do it, and it shows the need for investor education."

Watchers of message board activity were surprised that the case involved seemingly "ordinary" people. "It's clear they're coming closer to ordinary people manipulating stocks on message boards," says Mary Calhoun, president of

Calhoun Consulting Group

, which advises securities lawyers. "They're not registered, they're not experienced securities-fraud artists, they're not mobsters."

And with the Internet, it's more and more difficult to discern what's legitimate research. "The Internet allows ordinary people inexpensive access to a medium of mass communication, thereby creating an unfettered 'marketplace of ideas,'" says Lyrissa Lidsky, an associate professor of law at

University of Florida

who specializes in message board cases. "The problem is that there are no filters to prevent people ... from abusing the access for fraudulent ends."

But while the Wild West of the Internet may be teeming with potential scammers, avoiding an Internet scheme is a matter of common sense. "Nobody should purchase a stock based on a recommendation they see on the Internet from a source they don't know," says the SEC's Walker.