SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16461 / March 2, 2000
Securities and Exchange Commission v. Douglas W. Colt, 1:00CV00423 (D.C.D.C.) (EGS) (filed March 2, 2000)
SEC Sues Washington, D.C. Area Law Student
for Internet Price Manipulation Scheme
On March 2, 2000, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Columbia, alleging that Douglas Colt, a Washington, D.C. area law student, created the "Fast-Trades.com" website which he used to manipulate the price of four stocks during February and March 1999. According to the complaint, through a scheme centered on recommending stocks on his website, Colt drove up the short-term price for each stock by as much as 700%. By trading in advance of his stock recommendations, Colt generated over $345,000 in total profits for himself, his mother Joanne Colt, three of his law school classmates, and two of his friends. At times, their profits exceeded 500% within an hour of the recommendation. Within a few hours after the recommendations were disseminated to Fast-Trades subscribers, the stock price decreased significantly from its intraday high.
The Complaint alleges that Colt targeted low priced, thinly traded stocks knowing that his trades and subscriber activity would artificially increase the price of the stocks selected. For each of the four stocks selected, Colt and the other participants in the scheme collectively purchased a significant volume of the selected stock – in three cases more than 150% of the total average daily volume. For all four stock selections, Fast-Trades purchases were made shortly before the website disseminated its recommendations to its subscribers.
The Complaint further alleges that after making these purchases and before the recommendations to purchase the stock were e-mailed to the subscribers, Colt and the other participants entered sell limit orders or had orders entered on their behalf. Colt expected that unwitting subscribers would buy the recommended stock. Colt further expected that the purchases would drive the price higher still, triggering the sell limit orders. This is precisely what happened.
According to the Complaint, subscriber purchases were essential to the scheme. Thus, the participants needed to maintain and expand Fast-Trades' subscriber rolls. To attract new subscribers, Colt and his three law school classmates – Kenneth Terrell, Jason Wyckoff and Adam Altman – promoted the website by collectively posting hundreds of false messages to various internet message boards. These messages disguised the authors' connection with the site and misrepresented the investment success they achieved from following Fast-Trades' recommendations. Partly through these postings, the subscriber base grew to more than 9,000 people over a two month period.
In addition, the Complaint alleges that Colt posted a false "track record" on the Fast-Trades website touting the performance of several stocks he falsely claimed were Fast-Trades selections, and that the website contained a misleading disclaimer crafted by Colt, Terrell, Wyckoff and Altman that misrepresented their trading intentions to their subscribers. The disclaimer stated that Colt and the Fast-Trades representatives "may" trade Fast-Trades selections "at any time." In fact, for each of the four stocks, Colt had already purchased the selected stock and entered sell limit orders before Fast-Trades even distributed the selection to its subscribers.
The Commission's Complaint seeks to permanently restrain and enjoin Colt from violating the antifraud provisions of the federal securities laws, specifically Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder, and seeks civil monetary penalties. The Complaint also seeks disgorgement of all illicit profits from the manipulative scheme alleged in the Complaint, with prejudgment interest.
Simultaneous with the filing of the Complaint, Colt consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment permanently enjoining him from his violative conduct. Based on his demonstrated financial inability to pay, the Commission waived payment of disgorgement and prejudgment interest and did not seek the imposition of a civil monetary penalty. Also simultaneous with the filing of the Complaint, the Commission entered an administrative order related to the conduct described in the Complaint. Without admitting or denying the Commission's findings, Kenneth Terrell, Jason Wyckoff, Adam Altman and Joanne Colt consented to an Order directing them to cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and ordering Terrell, Wyckoff and Joanne Colt to pay disgorgement of all illicit profits with prejudgment interest. See In the Matter of Kenneth Terrell, Jason Wyckoff, Adam Altman and Joanne Colt, Securities Exchange Act Release No. 42483 (March 2, 2000). Based on Terrell's, Wyckoff's and Joanne Colt's demonstrated financial inability to pay, the Commission waived payment of disgorgement and prejudgment interest.
Additional Materials Available on This Topic
Complaint , SEC v. Douglas W. Colt
http://www.sec.gov/litigation/litreleases/lr16461.htm
