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Securities and Exchange Commission

Litigation Release No. 18614 / March 9, 2004

California Man to Pay $25,000 to Settle Securities Fraud Case Arising From Fake Reuters News Report Published on Internet Message Board

SECURITIES AND EXCHANGE COMMISSION v. Nikolai Safavi, Civil Action No. 04-378-RBW(United States District Court for the District of Columbia) (March 9, 2004)

The Commission announced today that it has filed a securities fraud lawsuit in the United States District Court for the District of Columbia against Nikolai S. Safavi for publishing on the Internet a fake "Reuters" news report falsely announcing, among other things, that Sina Corporation, a company whose shares trade publicly on the NASDAQ National Market System, received a "Market Underperform" rating in a newly issued Goldman Sachs research report. Safavi had acquired a short position in SINA stock days earlier, so that he would profit if the price declined. In fact, within an hour of the story's publication, SINA stock dropped in price by more than 3 percent. Without admitting or denying the allegations set forth in the Commission's complaint, Safavi consented to the entry of a final judgment permanently enjoining him from violating the antifraud provisions of the securities laws and imposing a civil penalty of $25,000.

The Commission's complaint alleges that on Friday, October 24, 2003, Safavi sold short 1,000 shares of SINA common stock at $42 per share. As a short seller, Safavi borrowed the 1,000 SINA shares that he sold, and agreed to acquire an equal amount of SINA shares at a later date to pay back the lender. Safavi stood to profit if the price of SINA common stock dropped below $42 per share. On Monday, October 27, shares of SINA common stock traded at prices between $42.35 and $43.88. On October 28, the market for SINA common stock opened at $45.60 per share, $3.60 per share higher than the price at which Safavi had sold short. At 12:58 p.m. on October 28, Safavi, using a screen name, published a fake Reuters news story, which listed two actual Reuters news reporters as the authors, on the Yahoo! Finance message board specifically dedicated to the discussion of SINA. The fake story, which Safavi created moments earlier, claimed among other things that Goldman Sachs had initiated coverage of SINA with a "Market Underperform" rating "because of valuation." Just prior to Safavi's posting SINA common stock was trading at $44.55 per share. Within half an hour of the posting, the price of SINA shares had dropped to $43.15 per share. On the morning of October 29, pursuant to a limit order, Safavi's short position was closed out, resulting in a profit to Safavi of $350 before transaction costs and interest. In addition to agreeing to pay a civil penalty in the amount of $25,000 for his conduct, Safavi also consented to the entry of a final judgment permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

SEC Complaint in this matter



Modified: 03/09/2004