A few hours after the New York market close on Feb. 1, an obscure Chicago artist by the name of Antonio Lee told the world he had become the world’s richest man.
The 32-year-old painter said Google’s parent, Alphabet Inc., had bought his art company in exchange for a chunk of stock that made him wealthier than Microsoft Corp. co-founder Bill Gates, Berkshire Hathaway Inc.’s Warren Buffett and Amazon.com Inc.’s Jeff Bezos — combined.
Of course, none of it was true. Yet, on that day, Lee managed to issue his fabricated report in the most authoritative of places: The U.S. Securities and Exchange Commission’s Edgar database — the foundation of hundreds of billions of dollars in financial transactions each day.
For more than three decades, the SEC has accepted online submissions of regulatory filings — basically, no questions asked. As many as 800,000 forms are filed each year, or about 3,000 per weekday. But, in a little known vulnerability at the heart of American capitalism, the government doesn’t vet them, and rarely even takes down those known to be shams.
“The SEC can’t stop them,” said Lawrence West, a former SEC associate enforcement director. “They can only punish the filer afterward and remove the filing from the system. So, caveat lector — let the reader beware.”
Honor System
Congress has already raised the alarm. For its part, the SEC, which declined to comment, has said those who make filings are responsible for their truthfulness and that only a handful have been reported as bogus. Submitting false information exposes the culprit to SEC civil-fraud charges, or even federal criminal prosecution.
For now, even the wildest claims are taken at face value. Consider Lee, who said his Alphabet shares were worth $3.6 trillion, almost two-thirds of the value of the 30 stocks in the Dow Jones Industrial Average.
In an interview, Lee said he had once made a living as a barber and a rental agent before turning to art. The company he claims to have sold to Alphabet has the unlikely name of YNoFace Holdings. It’s a nod to Lee’s specialty: acrylic paintings in which the subject has no face. On its website, the company has a striking symbol: a man in a red tie, his cheek resting on one hand, his face blank except for a red question mark.
“I always wanted to be wealthy, so I could have more free time with my family,” said Lee, a divorced father of three.
During a two-hour conversation at a Chicago art exhibition, Lee gave no indication that his statements were in jest or untrue. There is no evidence he profited from the filing or fooled any investors.
But other cases have had real costs. On May 14, 2015, Nedko Nedev, a dual citizen of the United States and Bulgaria, filed an SEC form indicating he was making a tender offer — an outright purchase — for Avon Products Inc., the cosmetics company. Avon’s shares jumped 20 percent before trading was halted, and the company denied the news. (A federal grand jury later indicted Nedev on market manipulation and other charges.)
After the fraudulent Avon filing, U.S. Senator Chuck Grassley, the Iowa Republican and former chairman of the Finance Committee, told the SEC it must review its posting standards.
“This pattern of fraudulent conduct is troubling, especially in light of the relative ease in which a fake posting can be made,” Grassley wrote in a letter to the agency.
In response, Mary Jo White, who then chaired the SEC, said it wouldn’t be feasible to check information. She noted that there were on average 125 first-time filers daily in 2014, and the agency was studying whether its authentication process could be strengthened without delaying disclosure of key information to investors.
Buffett Impersonator
But the phony filings continued. One relied on the impersonation of Buffett’s Berkshire. In September 2015, a Singapore-based entity calling itself LMZ & Berkshire Hathaway Co. filed two ersatz regulatory forms disclosing 10 percent stakes in both energy company Phillips 66 and food giant Kraft Heinz Co. Berkshire is the largest shareholder of both companies. A person using the name Loreto M. Zamora signed the filing.
This past November, the same filer struck again. The elusive Zamora made a fake takeover offer for Fitbit Inc., the maker of the ubiquitous exercise-tracking bracelets. The supposed bidder, ABM Capital Ltd., listed a Shanghai address. Fitbit said it received no such offer. Berkshire didn’t respond to requests for comment.
Honest disclosure rests at the heart of the SEC’s mission. Congress created the agency in 1934 because the public had lost faith in finance after the stock-market crash five years earlier. Its first chairman, Joseph Kennedy — the father of President John F. Kennedy — had profited from stock manipulation before the crash.
Easy Filings
In 1984, the SEC began an experiment with online filings. A decade later, the agency started requiring that all information be submitted in digital form through its Electronic Data Gathering, Analysis and Retrieval system, now universally known as Edgar.
Doing so is surprisingly simple. Applicants fill out an online questionnaire called Form ID and submit a document signed by a notary. The applicant is then granted access codes to Edgar. The entire process usually takes less than 48 hours.
Had the SEC taken more time, it may have had some questions for Lee, the Chicago artist. In his telling, his efforts to sell artworks led him to get in touch with some of the biggest movers and shakers in finance and technology: Bank of America’s chief executive Brian Moynihan, who liked his art, and Google founders Larry Page and Sergey Brin, who wanted to buy his company.
In one of his first SEC filings, on Oct. 19, Lee said Bank of America bought a stake in his YNoFace Holdings, the investment company associated with his art business, for shares worth $88 billion — which would rank it between the value of Starbucks Corp. and Nike Inc.
In another filing months later, Lee said that Alphabet acquired YNoFace Holdings in exchange for 4.5 billion of its Class A shares — more than 10 times the number of shares that are outstanding — and worth $3.8 trillion currently. Bank of America and Google said the filings and the claims of contact with executives were false.
Both filings remain on the SEC’s website.
This article was provided by Bloomberg News.
