DOJ And SEC Divide And Conquer To Police Coronavirus-Related Securities Fraud

Vinson & Elkins LLP

Vinson & Elkins LLP

In early June, federal agencies brought some of the first enforcement actions against COVID-19 securities fraudsters, involving over $100 million in fraudulent claims and profits, making good on their promise to investigate and prosecute those seeking to fraudulently capitalize on the COVID-19 crisis. The cases generally involve misleading claims about companies’ ability to supply COVID-19 testing or protection products, but regulators have targeted activity from two different angles—the operations and statements by companies themselves, and trading activity by investors attempting to manipulate the market. DOJ appears to have donned the mantle of examining misconduct by company executives, while the SEC is keeping its eye on the markets.

The Arrayit Cases

First, on June 8, DOJ filed charges in the Northern District of California against the president of California-based medical technology company Arrayit Corporation. The case is DOJ’s “first criminal securities fraud prosecution related to the COVID-19 pandemic.”1 The DOJ’s criminal complaint charges Mark Schena with one count of securities fraud and one count of conspiracy to commit healthcare fraud in connection with allegedly misleading statements about the company’s progress in developing a COVID-19 test kit, as well as the submission of $68.9 million in false and fraudulent claims to Medicare and private insurance plans for allergy and COVID-19 testing.2

The complaint alleges a two-phase scheme, one that predated the COVID-19 pandemic and then evolved to capitalize on the crisis. Arrayit’s original primary product was an allergy test that used “microarray technology” to test reactions to various allergens. The complaint alleges that beginning in 2018, Schena paid illegal kickbacks and bribes to recruiters and physicians to promote and order allergy screening tests for patients regardless of medical necessity, and subsequently submitted false and fraudulent insurance claims for those tests to Medicare and private insurers in violation of federal law.3 Schena also reportedly defrauded investors by making numerous false and misleading statements about Arrayit’s allergy test sales (inflated by the purported kickbacks), financial condition, and future prospects, including through an “aggressive promotional campaign” on Twitter.

According to the complaint, beginning in and around February 2020, Schena “used the COVID-19 pandemic as an opportunity to expand the pre-existing allergy test scheme and to capitalize on a national emergency for his own financial gain.”4 He allegedly claimed the company could employ its same microarray technology to detect COVID-19, and sought to bundle the company’s more lucrative allergy test kits with any COVID-19 tests that were sold. According to DOJ, Schena also marketed the tests as being in compliance with applicable regulations, and touted the company’s COVID-19 testing capability and future testing prospects to investors.

As a result, in mid-March, the price of Arrayit’s stock (which was being traded as “penny stock”) doubled. But in April, the FDA informed Arrayit that its COVID-19 tests were not at an acceptable performance level—a fact which Arrayit allegedly never disclosed to the public. On April 13, 2020, the SEC suspended trading of Arrayit’s stock because of questions regarding the accuracy of its public statements regarding its financials and COVID-19 blood test, and the criminal complaint followed. The charges against Schena carry a maximum combined penalty of 30 years imprisonment and over $5 million in criminal fines.

On June 9, 2020, the SEC followed up with its own complaint in the Northern District of California related to Arrayit. Rather than charging company executives, however, the SEC targeted an outside investor who had allegedly engaged in a misleading marketing campaign on a popular investor forum to artificially inflate the price of Arrayit’s stock while covertly dumping his own shares.

Specifically, the SEC’s complaint alleges that Jason Nielsen—one of Arrayit Corporation’s largest investors—violated antifraud provisions of the federal securities law by engaging in a “pump and dump” scheme from March to April 2020.5 According to the SEC, Nielsen posted hundreds of false and misleading statements on a popular online investor forum that touted misleading claims about Arrayit’s new COVID-19 testing capabilities, including that the test had been approved by the FDA. These posts “were designed to encourage other investors to buy Arrayit stock and, thereby, drive up the price of the stock.”6 Nielson, who posted under the anonymous username “PennyStock Alert,” publicly claimed to be loading up on Arrayit stock, but was actually dumping his shares as the price rose. He also purportedly engaged in “spoofing”—a practice of making and then canceling large share orders to give the false appearance of high demand for Arrayit’s stock. The SEC claims that Nielsen made approximately $137,000 in six weeks, and seeks remedies including disgorgement of profits and civil monetary penalties.

The Gomes Case

Also on June 9, the SEC filed an emergency action in Massachusetts against five individuals and six offshore entities for an alleged fraud scheme that allowed inside investors to use a network of shell companies to conceal that they were dumping shares, while (in some cases) simultaneously making misleading statements about their companies’ ability to manufacture and supply COVID-19 protection equipment.7 The SEC froze trading on several of these companies throughout 2020, and most recently obtained an asset freeze for the trading network itself. The scheme purportedly generated more than $25 million in unlawful profits while in operation.

The scheme allegedly enabled public company control groups — often corporate insiders that held large concentrations of various companies’ stock — to dump their shares through a network of offshore entities while concealing their identities. These types of control groups are required by law to file registration and disclosure statements when they sell stock, particularly in the volume that was allegedly being funneled through Gomes’ network. However, no such filings or disclosures were made. And by concealing their identities, these large shareholders could dump stock without signaling any concern to the market. In fact, the SEC alleged that at the same time these control groups were dumping stock, some were engaging in promotional campaigns that included false and misleading statements relating to COVID-19, such as the companies’ ability to supply PPE and retail kiosks.

The SEC suspended trading on four different companies tied to the scheme, and most recently obtained an emergency asset freeze on the network of offshore entities. The complaint claims that the network entities “continue to hold millions of shares of publicly traded stocks in their brokerage accounts that they are poised to dump.” In its accompanying press release, the SEC stated that it “will continue to act quickly to protect investors from investment scams, including those seeking to capitalize on the COVID-19 crisis.”

Future Enforcement Efforts

As is clear from these actions and other policy initiatives, the federal government has committed significant efforts to prevent, detect, and punish coronavirus-related securities and other fraud. In the DOJ’s Schena press release, officials said that “[i]nvestigating COVID-19 fraud scams billed to federal health programs — such as those charged here — are a top priority for our agency,” and that anyone “seeking to maximize profits while misleading investors should expect to pay a heavy price, especially now.” As V&E has previously noted,8 DOJ, the SEC and other regulators have recently taken major steps to protect investors from pandemic-related fraud, including by creating a cross-divisional COVID-19 Market Monitoring Group designed to assist the SEC with COVID-19 related oversight and enforcement. Further to these efforts, on June 23, 2020, the SEC will host a telephone town hall to educate investors about how to avoid scams related to COVID-19. Director of the SEC New York Regional Office, Marc P. Berger, will moderate the call, which is open and free to the public. Both the DOJ and SEC have also published dedicated COVID-19 related resources and public complaint forms online.9 With so much invested in enforcement, we should expect to see major enforcement activity to continue in this space.

1Press Release, Dep’t of Justice, Medical Technology Company President Charged in Scheme to Defraud Investors and Health Care Benefit Programs in Connection with COVID-19 Testing (June 9, 2020),

2Crim. Compl., United States v. Schena, No. 5:20-mj-70721-MAG (N.D. Cal. filed June 8, 2020), available at

3Affidavit in Supp. Crim. Compl. ¶ 6, United States v. Schena, No. 5:20-mj-70721-MAG (N.D. Cal. filed June 8, 2020).

4Id. ¶ 61.

5See Press Release, Sec. & Exch. Comm’n, SEC Charges California Trader Engaged in Manipulative Trading Scheme Involving COVID-19 Claims (June 9, 2020),

6Compl. ¶ 1, SEC v. Nielsen, No. 5:20-cv-03788 (N.D. Cal. June 9, 2020), available at

7See Press Release, Sec. & Exch. Comm’n, SEC Charges Microcap Fraud Scheme Participants Attempting to Capitalize on the COVID-19 Pandemic (June 11, 2020),

8Ephraim (Fry) Wernick, Brian L. Howard II & Laura K. Muse, Paycheck Protection Program Loan Borrowers Beware: SEC Turns Attention to Public Borrowers, V&E Report (June 1, 2020),; Ephraim (Fry) Wernick & Peter T. Thomas, How COVID-19 is Affecting International Corruption and Financial Crime, V&E Report (May 6, 2020),; Ephraim (Fry) Wernick, Branden Stein & Michael C. Hoosier, How COVID-19 Is Affecting the Enforcement of White Collar Crime, V&E Report (Apr. 9, 2020),; Jeffrey S. Johnston et al., SEC Ramps Up COVID-19 Response, V&E Report (May 6, 2020),

9See Dep’t of Justice, NCDF Disaster Complaint Form, available at; see also Sec. & Exch. Comm’n, Frauds Targeting Main Street Investors – Investor Alert (updated June 17, 2020),

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