## Facts

- The Securities and Exchange Commission (SEC) filed a civil injunctive action against Douglas W. Colt in the U.S. District Court for the District of Columbia based on alleged manipulation of four stocks in February and March 1999.
- The SEC alleged Colt created and operated the “Fast-Trades.com” website, through which he issued stock recommendations to subscribers.
- According to the complaint, before issuing each recommendation, Colt and certain family members, law school classmates, and friends bought shares of a targeted low-priced, thinly traded stock.
- In three instances, the group allegedly bought more than 150% of the stock’s average daily trading volume.
- After purchasing shares and before disseminating the recommendation, the participants allegedly entered sell limit orders (or had them entered on their behalf).
- Colt then issued a recommendation through Fast-Trades to buy the same stock, allegedly expecting subscribers to buy and push the price up enough to trigger the sell limit orders.
- The SEC alleged the recommendations triggered short-term trading surges and sharp price increases, in some cases driving prices up by as much as 700% and producing gains exceeding 500% within an hour.
- When the price rose, the sell limit orders allegedly executed, allowing Colt and his affiliates to sell into the price spike; prices allegedly fell after the brief trading spree.
- The SEC alleged Colt generated more than $345,000 in total profits for himself and the other participants.
- Subscriber purchases were alleged to be central to the scheme, so the complaint alleged Colt and others sought to grow the subscriber base to more than 9,000 people over about two months.
- To attract and retain subscribers, the SEC alleged Colt and his classmates posted hundreds of false messages on internet message boards that concealed their connection to Fast-Trades and misstated the success of following Fast-Trades recommendations.
- The SEC also alleged Fast-Trades displayed a false “track record” touting performance of stocks Colt falsely claimed were Fast-Trades selections.
- The complaint further alleged the site used a misleading disclaimer that misrepresented the operators’ trading intentions, including trading in advance of recommendations.

## Issues

1. Whether buying thinly traded stocks ahead of one’s own online recommendations, then selling into the price increase created by the recommendation, constitutes fraudulent or manipulative conduct in connection with securities transactions under federal antifraud provisions.
2. Whether false message-board postings, a false performance record, and misleading website statements or disclaimers constitute material misstatements or deceptive omissions in connection with the purchase or sale of securities.
3. What relief is appropriate in an SEC enforcement action resolved by consent, including permanent injunctive relief and monetary remedies such as disgorgement and civil penalties.

## Decision

- Colt, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment.
- The judgment permanently enjoined Colt from future violations of the antifraud provisions alleged in the SEC’s complaint.
- Although the SEC sought disgorgement and civil monetary penalties, the settlement did not require Colt to pay disgorgement or penalties based on his documented inability to pay.

## Legal Principles

- A scheme to trade ahead of one’s own securities recommendations and profit from the market reaction, while failing to disclose that conflict and trading intent, can form the basis for antifraud and market-manipulation claims by the SEC.
- Coordinated trading designed to create artificial price movements in low-priced, thinly traded securities—followed by sales into the resulting price increase—may be treated as manipulative conduct under federal securities laws.
- False or misleading communications used to generate investor demand (including anonymous or disguised internet postings, fabricated performance claims, and misleading website disclosures) may support claims of deception “in connection with” securities transactions.
- In a consent judgment, the court may enter permanent injunctive relief without litigating the merits, and the SEC may agree to forego or reduce disgorgement and penalties based on demonstrated inability to pay.

## Conclusion

SEC v. Douglas W. Colt involved allegations that Colt used Fast-Trades.com to recommend four thinly traded stocks after he and affiliates bought shares and placed sell limit orders, then sold into short-term price spikes allegedly caused by subscriber buying, while also using false online postings and misleading website claims; the matter ended in a consent judgment imposing a permanent injunction but no disgorgement or civil penalties due to Colt’s inability to pay.


SEC v. Douglas W. Colt, SEC Litigation Release No. 16461, 71 SEC Docket 1951 (2000)