The Securities and Exchange Commission has charged twin brothers from the U.K. with defrauding approximately 75,000 investors through an Internet-based pump-and-dump scheme in which they touted a fake 'stock picking robot' that purportedly identified penny stocks set to double in price.
Instead, the brothers were merely touting stocks they were being paid separately to promote.
The SEC alleges that Alexander John Hunter and Thomas Edward Hunter were just 16 years old when they set their fraud in motion beginning in 2007. They disseminated e-mail newsletters through a pair of websites they created to tout stocks selected by the robot – which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Their claims were persuasive as the Hunters received at least $1.2m from investors primarily in the U.S. who paid $47 apiece for annual newsletter subscriptions. Some investors paid an additional fee for the 'home version' of the robot software.
In reality, the SEC alleges that the Hunters used a third website to offer their services as stock promoters, claiming that they could “rocket” a stock’s price and increase its volume by sending out newsletters. The Hunters were consequently paid at least $1.865m in fees from known or suspected stock promoters, and they did not disclose to their newsletter followers the conflicting relationship between their two businesses.
'The Hunters used the anonymity of the Internet and the promise of easy riches to prey on investors', said Thomas A. Sporkin, Chief of the SEC’s Office of Market Intelligence. 'While touting their supposed breakthrough investment technology on two websites, the Hunters were racking up fees as stock promoters through a third'.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, the Hunters created websites Doublingstocks.com and Daytradingrobot.com to falsely tout that a former trading algorithm programmer from a large investment bank had designed a stock picking robot that they named 'Marl'. The robot could purportedly analyze the over-the-counter securities markets and identify penny stocks that were set to experience large price increases. The brothers offered investors paid subscriptions to their e-mail newsletter that would contain the robot’s latest stock pick.
The SEC alleges that the brothers separately created the website Equitypromoter.com where they marketed their newsletter subscriber list to penny stock promoters and boasted, 'One email to this list of people rockets a stock price'. The Hunters were in turn paid to send selected penny stock ticker symbols to their subscribers, who were misled to believe that the stock 'picks' were the product of the robot. The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors with shares worth less than they had purchased them for earlier in the day.
According to the SEC’s complaint, the Hunters also offered subscribers a downloadable version of the stock picking robot for an additional fee of $97. Rather than performing the analysis advertised, the software was actually designed to just deliver users a stock pick supplied by the brothers. In soliciting bids in 2007 from free-lance coders to create the software, Alexander Hunter wrote that the software should 'not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in'. He bluntly explained that the software 'is almost a ‘fake’ piece of software and needs to simply appear advanced to the user'. Like the newsletter, the home version of the stock picking robot was no more than a fraudulent delivery vehicle for stock symbols that the Hunters had been compensated to promote.