Corporate manipulation of stock prices.

In 2016, the Texas Southern District Court (5th Circuit) reviewed the case of Stephens v. Uranium Energy Corp. (S.D.Tex. July 15, 2016, No. H-15-1862) 2016 U.S.Dist.LEXIS 91897. Uranium Energy Corp. hired promotion companies to publish positive opinions about its stock price. Opinions included statements that Uranium Energy Corp. was an impressive emerging growth company, it should be on the top of investor radars, stock outlooks continued to look strong, and was well positioned to capitalize on the world’s overwhelming demands for more uranium, among other claims. ¹Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *8.

Each article also stated that it was a paid commercial advertisement. The articles also stated the amount of money received for the advertisement. One such example of disclosure included the following:

At issue in the case is the question of whether Uranium Energy committed fraud against investors by failing to disclose the temporary stock price boosts as a “risk” in the Item 404 filings with the SEC.

Stephens invested in Uranium Energy Corp. stocks, and he suffered when the stock price fell sharply. Stephens notes that an exposé article “revealed” Uranium Energy’s involvement in hiring these publications of positive information. After the exposé, the stock price plummeted.

Uranium Energy had the amended complaint dismissed before trial, because the claim failed to state a cause of action that was likely to succeed. The court evaluates whether the claims dismissal was warranted based on the contents of the complaint.

Relevant Law

“Fraud based on an omission must sufficiently allege a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” ³Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *30., internal quotations removed A corporation need not disclose all information, because some information “is of such dubious significance that . . . its disclosure may accomplish more harm than good.” ⁴Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *30. To balance concerns of that the court may unjustifiably set the bar too high for disclosure, the plaintiff must state not only the omissions, but also must show how those omissions negatively impacted the stock price. ⁵Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *30-31.

Merely ommitting a material fact is not enough, “plaintiffs must state with particularity facts giving rise to a ‘strong inference’ that the defendant acted with scienter. [Citation.] For each act or omission alleged to be false or misleading, plaintiffs must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” ⁶Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *31-32, internal quotations ommitted. “An officer’s company position can support a scienter inference only when viewed with other, special circumstances, including: (1) a small company in which corporate executives are likely to be familiar with day-to-day operations; (2) transactions ‘critical to the company’s continued vitality’; (3) omitted information readily apparent to the speaker; and (4) internally inconsistent statements by the officer.” ⁷Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *37, internal quotations omittted.

Findings of the Court

• The market was aware of the advertising campaign, because each publication included a full disclosure.
• Because the market was aware, added information in the SEC filing could not have provided investors with information they did not yet already know.
• Plaintiffs failed to show sufficient facts to show that any defendant acted with scienter.
• Plaintiff also failed to show that the revealing of the truth caused the stock price to fall.

Uranium Energy did hire third-party publishers to publish, promote and circulate positive information about the stock’s potential. This information was widely disclosed in each and every publication (except for one). There was no obvious intent to defraud.

Corporate Officers (Adnani and Katsumata) signed the SEC filings, and filings could have included additional risks. However, Stephens alleges no facts that suggest that the officers were aware of the material facts, intended to omit them, or intended to defraud investors in doing so. “A company may advertise or promote its stock without violating the securities laws.” ⁸Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *43.

Although it is not unlawful to promote a stock, it is unlawful to promote a stock communication that fails to describe consideration received (or that will be received) from the stock’s issuer. ⁹Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *43. The duty to disclose is placed upon the publisher. ¹⁰Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *43. Here, the publishers did disclose compensation associated with the stock-related communications.

“Absent an affirmative duty to disclose the advertisements, Adnani’s and Katsumata’s general knowledge of the advertising campaign does not support an inference that they acted with scienter.” ¹¹Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *44.

Contrast this against CytRx Corp.:

Unlike CytRx, promotions here revealed that they were paid advertisements or “otherwise contained misleading information” about Uranium Energy. ¹³Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *50. Stephens makes no allegations that Uranium Energy had direct involvement in the authoring or editing of publications. ¹⁴Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *50. Uranium Energy also did not plan or execute stock options or trades to benefit from the temporarily increased stock pricing. ¹⁵Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *50. “In other words, this amended complaint alleges a ‘pump’ scheme without any ‘dump.'” ¹⁶Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *51.

Conclusion

The court expressly states the answer to our question: “A company may advertise or promote its stock without violating the securities laws.” ¹⁷Stephens v. Uranium Energy Corp., supra, 2016 U.S.Dist.LEXIS 91897, at *43. But, like all things in the law, there is more to it than the simple answer.

While a company can advertise or promote its stock to boost (or sink) its price, it cannot intentionally omit information about the risks associated with these activities in the public filings. Scienter is a key element that differentiates between a harmless omission of a material fact and an act of fraud.

When advertising to promote stock price, make sure that none of the corporate activities take advantage of the temporary price boost in a way that might constitute insider trading. The court pointed to the CytRx case, in that case, CytRx committed many infractions. One of the infractions that led to the inference of scienter was the evidence of well-timed stock options.