I had really hoped to avoid thinking about this…

…but someone asked and I suppose it involves the minor “beat” I’ve carved out for myself, so I should say something.

The whole DKos/Jerome Armstrong brouhaha — the details of which I have studiously tried to avoid because I can gaze at my own navel without outside assistance, thankyouverymuch — apparently began with the news that Jerome Armstrong once pled no-contest to an SEC civil complaint alleging stock fraud.

The case is described here, but, hell, that’s no reason for me not to describe it again.

The complaint alleges a couple of different kinds of fraud, and the DKos post linked above correctly notes that Armstrong only had a tiny piece of it and most likely was unaware of the rest. The complaint is civil, not criminal, which is very common — the SEC doesn’t often charge criminal violations of the securities laws and usually the conduct has to be particularly egregious or intentional to qualify.

Some background: The securities laws generally forbid public sale of stock unless the company registers with the Commission and files all kinds of documents detailing the company’s operations. There are certain exceptions, however, that will allow limited amounts of stock to trade, if they meet certain requirements, even without a registration statement in effect. Here, it appears the defendants began their scheme by trying to conceal the origin of their shares to make it look as though they could legally trade publicly without a registration statement. They also tried to make it appear as though the stock was widely held, instead of concentrated among a few people, so that they could manipulate the price upward and the public would think the increases represented true demand for the stock.

Anyway, the owners of the company and some crooked brokers got together and started engaging in pre-arranged trades at really high prices, so that anyone following the stock would think there was this big demand for a new hot company. Once they got the price high enough to interest the public, they began selling — and the price collapsed.

While this was going on, the defendants apparently engaged Armstrong to assist them in generating public interest in the stock. And here’s essentially the complete allegation against Armstrong:

Markow and Goelo orchestrated a scheme to arrange for individuals, including Armstrong, to tout the BluePoint stock. Armstrong posted over eighty times on the BluePoint message board located on the Raging Bull website in the first three weeks. He praised BluePoint’s investment value and encouraged traders who were having trouble getting their orders filled to keep trying. Armstrong never stated in his posts on the Internet that he was being compensated for making the postings. However, Goelo and Markow compensated Armstrong by transferring stock in three separate companies to Armstrong at below market prices during the relevant time period.

Armstrong made at least $20,000 from selling the shares of the three securities he received from Markow and Goelo.

What law did this violate?

According to the complaint, Armstrong was charged with a violation of 15 U.S.C. § 77q. That statute reads:

(a) Use of interstate commerce for purpose of fraud or deceit
It shall be unlawful for any person in the offer or sale of any securities … by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
(b) Use of interstate commerce for purpose of offering for sale

It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

Armstrong wasn’t charged with a direct violation of subsection (a), which forbids fraudulent statements. Instead, he was charged with violating subsection (b) — namely, the requirement that you ‘fess up when you’re being paid to promote a stock. That kind of provision is something of a prophylactic: It requires disclosure of compensation in all cases, no matter what, even if there might, theoretically, be some instances where the disclosure isn’t necessary to avoid misleading people.

Anyway, given the fact that the allegations against Armstrong encompassed one paragraph in a much larger complaint, yu have to assume that Armstrong didn’t know about the greater scheme. And, the DKos post says, there were lots of other people doing the same thing, but apparently the SEC couldn’t get enough evidence to justify a lawsuit.

But, come on, he was a grownup. He knew something was fishy and simply didn’t ask questions. And you have to wonder how the corporate defendants knew to approach him. According to the complaint, he made a living from stock trades at the time, and probably was something of an internet presence. We should also keep in mind the context: These were the wild fraud-fueled days of the internet stock boom, when stock touting for concealed compensation was practically an industry standard.

The DKos post points out that Armstrong defended himself and ultimately pleaded no contest. For the record, it’s not unusual for defendants in SEC civil suits to proceed without representation. The nuts and bolts of SEC work isn’t Enron — it’s little cases of smalltime stock fraud, and many of the defendants involved can’t afford counsel, which is likely what happened here. Maybe he pled no contest simply because he couldn’t afford to fight the charges, but I tend to think everyone is guilty in white collar cases and it wouldn’t do for me to change that policy just because he’s liberal, so yeah, I think he did it.

What’s the upshot? At the end of the day, we have Jerome Armstrong, who, at the time, derived all of his income from day trading, who, at the height of the boom — and it was really a wild west out there as far as internet trading and promotion went — likely engaged in some unethical conduct involving an internet payola scheme that was one tiny portion of a much larger fraud. Conservatives argue that this is another piece in the puzzle establishing a history of internet payola for Kos and Armstrong, and I haven’t paid enough attention to have an opinion on that aspect. I guess it comes down to whether you think this kind of behavior evidences a pattern of conduct or a one-time aberration.

If you even care.