Ad or Not? Stock Tips Edition

In the article “Following The Latest In Alzheimer’s Research As An Investor” on the investment research site Seeking Alpha, self-proclaimed accountant and investor Justin Gallagher makes the case for Anavex, “a little biotech company” with a promising new Alzheimer’s treatment that at the time of publication was a penny stock.

The time to invest is now before the treatment gets FDA approval and the company is flung from obscurity into every investor’s portfolio, he suggests.

“I am sure this company is off most investors’ radars,” Gallagher writes, adding that the nascent Alzheimer’s treatment “has the ability to provide symptomatic relief, but also may be used for disease modification. There is no drug like that today.”

But there’s just one problem with Gallagher’s advice: It’s been paid for by the company, according to a recent SEC complaint against the writer and the stock promotion firm that hired him. In fact, Justin Gallagher isn’t even the writer’s real name. It’s a pseudonym. The author’s real name is John Mylant. And that photo on Gallagher’s Seeking Alpha profile of a bald man that looks sort of like Bruce Willis in his Pulp Fiction days, that’s fake too according to the SEC complaint.

The complaint is part of a sweeping crackdown by the SEC against a number of alleged biotech stock promotion schemes that the agency said attempted to pass off hundreds of paid-for articles as unbiased, independent investing research. The articles were submitted and published on several mainstream financial sites, none of which were named in the actions. These sites included Yahoo Finance, The Motley Fool, Forbes and Seeking Alpha. The SEC has so far settled with 17 of 27 companies and individuals charged who are paying penalties ranging from $2,200 to nearly $3 million.

It is not illegal for a publicly traded company to pay a promotion firm to hire writers to pen positive or bullish articles about the stock — so long as that relationship is disclosed in the post. But not only did hundreds of writers like Mylant fail to disclose that they were compensated, they professed the opposite. For example, Mylant claimed in a disclosure at the bottom of the article on Seeking Alpha, which prohibits paid-for posts (emphasis added):

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The fact that the SEC decided to take action against the influencers or writers themselves is noteworthy in and of itself. In previous FTC cases involving When an individual (or cute pet) promotes a good or service, primarily on social media, because they were paid to do so, or because of a material connection between the person (or pet) and the company it’s been the companies or brands and not the content creators who have been cited.

In separate statements, Seeking Alpha and The Motley Fool both derided the practice of paid-for stock promotion as “unethical” and pledged to remove the articles named in the crackdown.

The bottom line? The Ad-or-Not game extends to the financial sector. When researching investments online, the SEC says consumers need to be wary of articles in which a company is promoted more heavily that its products or services, verify what they’re reading with multiple sources, and scrutinize write-ups on penny stocks that may be particularly susceptible to promotion schemes.

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