The White House is not the only place where “fake news” is the big problem. The Securities and Exchange Commission (“SEC”) is focusing on its own fake news problem. The SEC has announced a crackdown on individuals purporting to report legitimate news and analysis on stocks who are actually being paid as “shills” to push and promote the stocks in exchange for undisclosed cash payments and other compensation.
According to the SEC, several biotech companies hired public relations firms to promote their stocks and those PR firms, in turn, hired paid writers to post bullish articles and blogs about the stocks which appeared to be unbiased but which were, in reality, paid advertisements for the stocks written for the sole purpose of hyping the stock and inflating the market prices of those stocks.
According to Stephanie Avakian, the acting director of the SEC’s Division of Enforcement, “if a company pays someone to publish or publicize an article about its stock, it must be disclosed to the investing public.” She added, “These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses.”
The SEC filed fraud charges against three public companies and seven stock promotion or communications firms, along with two CEO’s, six individuals, and nine writers. The publications involved, which include several highly-respected sites- haven’t been charged, or named and may have been victims of the scams themselves since the writers receiving the payments apparently did not disclose those payments to the publications. So far, 17 of those charged have settled with the SEC, paying fines between $2,200.00 to nearly $3 million.
The SEC released an investor alert warning that investor research websites are not necessarily to be trusted, particularly those focusing on micro-cap stocks, which the SEC says are particularly susceptible to stock promotion schemes and other forms of market manipulation.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
Many independent registered representatives and investment advisors form Subchapter S corporations (S-Corps) and deposit their fee and commission checks received from their BD’s or investment advisory firms into those S-Corps and then pay their business expenses from those corporations. The benefit of this arrangement is the ability to pay lower taxes and use more advantageous deductions and pension arrangements only available to corporations and other entities. Sometime the practice varies and brokers/advisors form an LLC instead of an S-Corp. A recent ruling by the IRS against a broker sounds a warning to those using this method of assigning commission and fees, paid to the broker/advisor, to their wholly owned entities.
Broker-Dealers and advisory firms are required by SEC rules and regulations to only pay commissions and investment related fees to the individual licensed to receive them, not to entities formed and owned by the broker/advisor. But many independent broker/advisors want to use an entity – either an LLC or a Sub-S corp to allow them to have more advantageous tax treatment for expenses and better pension plans. That’s exactly what one broker did and he landed in trouble with the IRS.
The advisor, Ryan Fleischer, has his own, independent investment advisory practice and is licensed with both LPL and Mass Mutual. Instead of operating as a sole proprietor, however, and reporting his income and expenses on Schedule C to his personal tax return – which are scrutinized heavily by the IRS – he formed a wholly owned S-Corp into which he deposited all fee and commission income payments from LPL and Mass Mutual. In 2010, his wholly owned S-Corp, FWP, paid Fleischer a salary of $35,000, and he reported business income – Subchapter S income – of an additional $147,600. Subchapter S income is not subject to the same additional taxes, such as social security and self-employment tax, as ordinary income. The IRS, on audit, however, determined Fleischer should have reported all of that income on his personal tax return, Schedule C, and all of the income should have been treated as ordinary income. The IRS dunned him for app. $40,000 in back taxes. He took the IRS to tax court and his case recently was decided against him and in favor of the IRS. The tax court determined Fleischer was, in fact, a sole proprietor and all of the income he received from LPL and Mass Mutual was his income and not the corporation’s. In other words, since LPL and Mass Mutual paid the fees and commissions to him, it was his income and not his corporation’s.
The use of S-Corps and LLC’s as pass through entities for independent brokers and advisors is a fairly typical business model used by many in the industry. The Fleischer case, however, is a wake-up call that doing what is done by many brokers/advisors in the independent space is no assurance the business model will not be attacked and back taxes and possible penalties and interest will be claimed by the IRS.
Shustak Reynolds & Partners, p.c. focuses in the areas of securities, financial services and complex business disputes. For more information, contact our managing partner, Erwin Shustak. More information is available at www.shufirm.com.
