An investment adviser should not buy positions on their own behalf shortly before recommending that position to its clients. Nor should the adviser make recommendations to buy when the adviser is selling in the adviser’s personal accounts. Mark A. Gomes was doing just that.
The test case came against Capital Gains Research Bureau. The firm produced a monthly newsletter recommending securities. In 1960 the firm purchased securities before recommending them in its report for long-term investment. On each occasion, there was an increase in the market price and the volume of trading of the recommended security within a few days after the distribution of the Report. Immediately thereafter, the firm sold its position at a profit.
As you might expect, it’s the internet that has replaced the monthly newsletter. “Stock analysts” are making claims on SeekingAlpha, Twitter, and other websites.
Mr. Gomes distributed his recommendations through his own website and a third party website. He had a premium subscription that gave subscribers more access. He never disclosed that he held positions in some of the stocks he was discussing.
On at least five occasions between February 2014 and July 2014, (1) Gomes purchased shares in a stock (2) recommended buying that stock, and then (3) sold shares in his personal accounts within days of his recommendation. In at least one instance, Gomes began selling shares only a few hours after posting his recommendation.
By recommending investments, but failing to disclose that he would trade in the opposite direction of his recommendations, Gomes omitted material information necessary in order to make his recommendations not misleading. A reasonable investor would consider Gomes’s intention to sell his shares as an important factor in assessing the objectivity and credibility of his descriptions.
I did find it interesting that the complaint skipped over the fact that Mr. Gomes was not registered as an investment adviser. According to Section 202(a)(11):
‘‘Investment adviser’’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities;…”
Sources:
- Complaint Against Mark A. Gomes
- SEC v. Capital Gains Research Bureau, Inc. 375 U.S. 18 (December 9, 1963) (.pdf)
- SEC v. Capital Gains Research Bureau and the Investment Advisers Act of 1940 (.pdf) by Arthur B. Laby
- SEC v. StocksToWatch.com
- SEC Files Fraud Charges Against Dallas Investment Adviser and Its President in $1.9 Million Junk-Fax “Scalping” Scheme