SEC Crackdown On 'Fake News' Is Itself Fake News

On April 10, the Securities and Exchange Commission filed sweeping charges against 27 companies and individuals that it accused of a simple stock promotion scheme — namely pretending that they were providing independent and objective analyses when in fact they were being paid to tout a stock.

The case has garnered much attention in an age when there's a raging debate about how to combat "fake news." One headline about the SEC case blared: "SEC Signals No Patience for Fake News on Stocks."

If only that were true. Unfortunately, commentators are ignoring an uncomfortable fact: the SEC is quick to jump on issuers for all kinds of perceived wrongdoing — including making overly optimistic statements or paying for promotion — but it rarely pursues short sellers, the name for investors who make money when stock prices go down, not up. These individuals daily spew misleading or downright false information in order to turn a quick profit and deserve more scrutiny from the SEC.

This enforcement imbalance deceives potential investors, damages existing shareholders, and harms innovation as emerging companies struggle against the steady drumbeat of deceptive information disseminated by short sellers.

The new SEC chairman ought to seize on this issue and direct his enforcement staff to right this imbalance and go after those who intentionally spread malicious information about U.S. companies.

The SEC's April 10 sweep focused on bullish commentary disguised as independent and objective research, which appeared in Seeking Alpha, Benzinga and similar websites. In reality, corporate issuers had paid promoters to write the articles and comments. The SEC alleged violations of a specific statute, Section 17(b) of the Securities Act of 1933, which requires publishers of information about securities to disclose if they were compensated for their opinions. In the more egregious cases, the SEC also brought fraud charges against both the promotional firms and the issuers who paid them.

Although the media treated the SEC's announcement as groundbreaking, the Commission has been bringing similar cases for years. All the way back in 1998, while we were still in the era of dial-up internet service, the SEC brought an even larger sweep under Section 17(b) against 44 defendants, and has brought numerous cases since.

While it is salutary that the Commission is again going after unscrupulous stock touts, it is troubling that the SEC has not shown the same appetite to reign...