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How the fake biz news scheme was uncovered

Mark Lennihan / AP

Earlier this week the U.S. Securities and Exchange Commission filed enforcement actions against 27 individuals and entities that had used sites like Seeing Alpha, Forbes and Yahoo Finance to post "bullish articles" about listed biotech companies "under the guise of impartiality when in reality they were nothing more than paid advertisements."

What happened: Now we've learned more about how the scam first came to the SEC's attention, per a source familiar with the situation:

  • In 2013, a Seeking Alpha contributor named Richard Pearson was contacted by a self-described investor relations firm, asking him to write paid promotional articles about a publicly-traded biotech companies Galena Biopharma and CytRx, without disclosing the payments (which would be a violation of Seeking Alpha policy).
  • Pearson played along to learn more about the scam, submitting a few dummy articles. He then submitted everything he had learned not only the Seeking Alpha, but also to the SEC. He also would later make his top-line allegations public via a Seeking Alpha post.
  • Seeking Alpha immediately launched an internal investigation, removing dozens of articles and tightening up its contributor requirements (none of the publishers were charged by the SEC). It also provided information to the Agency, which managed to identify several fraudsters that website had been unable to pin down.