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Twitter Stock Pumper Avoids Prison For Microcap Fraud

Law360, New York (June 27, 2022, 7:42 PM EDT) — A would-be Twitter-based stock sage on Monday was sentenced to six months of house arrest for what prosecutors say was a social media-based pump-and-dump scheme designed to induce his followers to drive up the share price of a worthless shell company.

Ohio day trader Steven Gallagher, 51, was sentenced to time served and three years of supervised release, with six months of the sentence to be served under home confinement. U.S. District Judge Valerie Caproni in Manhattan also fined Gallagher $10,000 and ordered him to forfeit $21,716.

Gallagher in February pled guilty to one count of securities fraud. Prosecutors say he used his Twitter account, named after a character from the cult classic film “A Clockwork Orange,” to artificially pump up the share price of microcap stock SpectraScience Inc., which was in fact a shell company with no operations.

Beginning in late 2020, Gallagher and others discussed plans to buy SCIE stock while it was cheap and then tout the stock on Twitter, according to the government. Gallagher subsequently purchased about 26 million SCIE shares, and began to hype the stock using his “Alex DeLarge” themed Twitter handle.

After a series of tweets promoting SCIE stock, the share price by late January 2021 had increased around 300 percent and Gallagher began selling off his position, prosecutors say, at the same time falsely telling his Twitter followers that he had not sold any SCIE shares and continuing to encourage others to buy SCIE stock. He netted about $22,000 from his SCIE trading.

In a brief statement to the court, Gallagher apologized to his wronged Twitter followers and promised Judge Caproni that he would never again appear in her courtroom.

“I wanted to be someone who did right, and I did not live up to those goals,” he said.

Judge Caproni seemed unconvinced by Gallagher’s expression of remorse, saying he was minimizing his wrongdoing. She also took aim at the assertion in Gallagher’s sentencing memorandum that he got into trading penny stocks as a way to diversify his portfolio, calling the explanation “preposterous.” But the judge said Gallagher’s scheme was “not the biggest fraud the court has ever seen.”

“This conduct was deplorable,” Judge Caproni told Gallagher, “and it went on even after you were warned by your brokerage.”

Judge Caproni noted that while the penny stock market has always been rife with fraud, social media sites like Twitter and Reddit have “supercharged that,” and allow fraudsters to prey on the most vulnerable and sophisticated investors.

“It’s not a victimless crime,” Judge Caproni said.

Prosecutors had sought incarceration for Gallagher, recommending a sentence within the advisory sentencing guidelines range of 8 to 14 months in prison. Assistant U.S. Attorney Richard Cooper told Judge Caproni that Gallagher is well off financially and did not commit this crime out of necessity.

“This was a crime of opportunity and greed,” Cooper said.

An attorney for Gallagher, Eric Rosen of Roche Freedman LLP, focused much of his argument to Judge Caproni on Gallagher’s personal characteristics, leaning in on his history of charity, and his role as an employer of hundreds of people in his Toledo, Ohio-based magazine telemarketing business.

Rosen also said that general deterrence is served in low-level cases like Gallagher’s by bringing the charges in the first place, and that he has already been pilloried in the press as being akin to an “old-school boiler room” fraudster.

Moreover, the Securities and Exchange Commission — which brought a parallel action against Gallagher — has frozen all his assets, resulting in hundreds of thousands of dollars in losses, Rosen said.

A spokesman for the U.S. Attorney’s Office for the Southern District of New York declined to comment after the sentencing hearing.

In a statement, Rosen said Gallagher looks forward to serving his sentence and putting his conduct behind him.

“The court’s sentence was fair and just, and Mr. Gallagher accepts the court’s reasoned judgment,” Rosen said.

The government is represented by Richard Cooper and Daniel Tracer of the U.S. Attorney’s office for the Southern District of New York.

Gallagher is represented by Eric Rosen and Richard Cipolla of Roche Freedman LLP.

The case is U.S. v. Gallagher, case number 1:22-cr-00122, in the U.S. District Court for the Southern District of New York.

–Editing by Peter Rozovsky.

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