SEC reaches deal with U.K.'s Hunter brothers
2012-11-26 13:40 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
by Mike Caswell
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The U.S. Securities and Exchange Commission has reached an out-of-court settlement with Thomas and Alexander Hunter, the U.K. twins facing civil fraud charges over a "stock picking robot" they set up at the age of 16. The SEC has not yet released details of the deal, but has asked that the judge suspend the case until the commissioners authorize the settlement. The regulator had initially sought disgorgement of profits, which could be as much as $3-million, plus an appropriate fine. (All figures are in U.S. dollars.)
The SEC claimed that the brothers were behind a market manipulation scheme in which they created a "stock picking robot" that could purportedly identify highly prospective penny stocks. Thousands of investors subscribed to the picks the "robot" produced, but the stocks were actually companies that the brothers entered, the SEC said. The companies included Vancouver-linked OTC Bulletin Board listing Holloman Energy Corp. and Toronto-based OTC-BB listing UOMO Media Inc. (Neither company was accused of any wrongdoing.)
In a status report filed Nov. 14, 2012, the SEC has asked that the judge suspend all deadlines in the case while the commissioners consider the settlement. Upon completion of that process (which typically takes several weeks or even months) the SEC will file a proposed judgment, which will spell out the fines and any other sanctions for the brothers. Although the SEC does not state the monetary penalty it is seeking, in its complaint it said the brothers received $3-million during the scheme.
Marl, the stock picking robot
Full details of the charges against the brothers (who are now 22) are contained in a civil complaint the SEC filed in the Southern District of New York on April 20, 2012. The complaint described a newsletter they ran in 2007 and 2008 that relied on a stock picking robot that they named Marl. They represented to investors that Marl had been developed by Michael Cohen, a contractor who created a computer stock trading model for Goldman Sachs.
The problem with Marl, according to the SEC, was that he did no actual analysis. Although some subscribers to the newsletter received software that appeared to perform some sort of analytical work, the program actually did nothing of the sort. It was simply programmed to produce stock picks from a database that Thomas Hunter maintained, according to the complaint. The newsletter attracted 75,000 subscribers in the U.S., who paid $1.2-million in fees, the SEC said.
In addition to the fees the brothers earned from investors, they generated money by charging stock promoters to have their companies featured in the newsletter, the SEC claimed. According to the complaint, they operated a separate service called equitypromoter.com, in which they advertised the ability to "rocket" the price of thinly traded penny stocks. In all, promoters paid $1.8-million to have Marl pick their stocks, the SEC said.
Of the stocks that the brothers touted, the one with the largest gain was Toronto's UOMO Media. It went to $1.06 from 35 cents on May 19, 2009, after Marl purportedly recommended the company, the SEC claimed. Its volume went to 20.3 million shares, from 86,000. (Within days the stock had fallen to 33 cents, and it was last at 15 cents.)
The other Canadian example that the SEC listed was Holloman Energy, which had an office in Calgary and a contact number in Vancouver. On Nov. 6, 2007, after the newsletter listed the company as a pick, it went to $1.04 from 94 cents. (By Nov. 13 the stock had fallen to 70 cents, and it was last at 40 cents.)
The complaint sought disgorgement of profits and appropriate civil penalties. In addition to the brothers, the suit named as a relief defendant a Panamanian company, Regent Investment Group Corp.
The brothers, for their part, denied any wrongdoing. In an answer filed on June 27, 2012, they said that any representations that they made about stocks were mere "puffery" that included adequate disclaimers. They also said that the SEC had not shown they made any material misstatement or omission. Although the answer was 10 pages long, it had few other details and mostly contained general denials.
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