A Long Island technology company, Cemtrex Inc., was mentioned in a Securities and Exchange Commission fraud case that charges a research firm and its two principals with selling its "supposedly unbiased" reports. Cemtrex was not charged in the case.
The SEC's civil lawsuit filed in U.S. District Court in Manhattan says that Farmingdale-based Cemtrex in September 2017 agreed to pay the Manhattan research firm, SeeThruEquity LLC, $14,500 for 18 months of research coverage.
The SEC complaint said the payment was not disclosed in the research reports on Cemtrex.
SeeThruEquity's news release announcing the initial report on Cemtrex said the research firm's "innovative business model" provides for equity research that is "not paid for" and is "unbiased," the SEC said.
The SEC charged that SeeThruEquity's principals, co-founder and chief executive Ajay Tandon and co-founder and director of research Amit Tandon, both of Manhattan, inflated share-price targets for the companies covered by their research. The SEC said the brothers also "made other false statements and omissions."
SeeThruEquity's Oct. 5, 2017, report on Cemtrex listed a recent share price of $2.84 and a price target of $6.45.
Shares of Cemtrex rose 6.7 percent Monday to close at $1.27.
Calls and emails seeking comment from SeeThruEquity were not returned.
The SEC's complaint also said the Tandons tried to obscure the payments by disguising them as fees for making presentations at investor conferences.
"Approximately 233 out of the 241 companies in STE's research universe as of March 30, 2018, or 97 percent, paid STE ostensible conference presentation fees," the complaint said.
Cemtrex chairman and chief executive Saagar Govil acknowledged in an email that his company "paid a small fee" for research coverage and to present at one of SeeThruEquity's conferences.
"Paying a modest sum for coverage is customary for microcap public companies since most other securities analyst coverage is for larger ... companies," he said. "Cemtrex never directed or expected that SeeThruEquity issue a research report that would include a higher price target. Cemtrex was unaware of any of the misconduct, if any, underlying the SEC's allegations."
The lawsuit said that SeeThruEquity received at least $500,000 from companies it was covering from Jan. 1, 2014, to the present.
The lawsuit was filed on Thursday.
Michael Desepoli, vice president of Heritage Financial Advisory Group, a Port Jefferson Station investment firm, said it is not uncommon for microcap and small capitalization companies to pay for research, but those relationships typically are disclosed.
"It can help you gain traction in the market," he said.
Market capitalizations of microcaps typically are defined to begin at $50 million, while small-cap stocks start at $300 million.
Desepoli said investors should investigate the source of research reports, gather multiple opinions and beware of get-rich quick pitches like "this company is going to be like buying Netflix for a dollar.
"Microcaps are microcaps for a reason," he said.
Cemtrex's market capitalization is about $16.4 million.
The SEC lawsuit calls for the Tandons and SeeThruEquity to disgorge profits from "ill-gotten gains," including interest, and seeks an order that would bar them from promoting the issuer of any security.
In October, Cemtrex, which makes a standing desk whose integrated computer responds to hand gestures, agreed to pay $625,000 and reform its corporate governance policies to settle several securities class-action lawsuits filed in federal and state courts.
One of those cases, filed in U.S. District Court in May, charged that Govil and other executives skirted federal reporting rules governing stock transactions.