Tuesday, January 11, 2005

Former MarketWatch.Com Commentator Settles SEC Scalping Complaint

Thom Calandra, a co-founder of CBS.MarketWatch.Com and publisher of a newsletter (The Calandra Report), agreed to settle an SEC complaint accusing him of securities fraud in connection with stock recommendations in his newsletter while he secretly accumulated shares in the companies right before the recommendation and then sold them shortly thereafter once the recommendation caused an increase in the price.  Calandra also received shares in two Canadian mining companies at a substantial undisclosed discount from a stock promoter that he then recommended to his readers.  According to the Commission's Litigation Release:

Calandra made over $400,000 in illegal profits through a practice known as "scalping"-buying shares of thinly-traded, small-cap companies, writing highly favorable newsletter profiles recommending the companies to his newsletter subscribers, and then selling the majority of his shares when the increased demand generated by his favorable columns drove up the stock price. From March to December 2003, Calandra followed this "Buy-Write-Sell" pattern for 23 different stocks that he covered in The Calandra Report, without disclosing his actions to his readers.

A Wall Street Journal article quotes Calandra: "I am happy to have finally reached a settlement with the SEC on this matter. It has been a challenging year, to put it mildly, and I do not wish to expose my family to a protracted public dispute with the Commission on this matter."

Scalping claims are not often pursued by the Commission against non-broker-dealers, and this case illustrates one of the problems with such an action.  While Calandra made money from his trades in highly speculative stocks, his obligation to his readers is not clear when there is no existing fiduciary relationship in the traditional sense of the term.  When one subscribes to a stock tip sheet--for lack of a better term--should the person expect that the author will not profit from trading in the shares?  That said, scalping is a type of "pump-and-dump" that has all the hallmarks of a ponzi scheme, and the SEC certainly will not turn a blind eye to a pattern of trading and hidden arrangements. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2005/01/former_marketwa.html

Civil Enforcement, Securities | Permalink

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