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SEC Insights - October 2012

 

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams

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The best tool in investing wisely is having adequate and relevant information about the company you want to invest in. This information is not always available for microcap stocks.Microcap stocks are low-priced stocks traded at very-low volume issued by smaller companies with very limited assets. Many microcap companies do not file financial reports with the Securities and Exchange Commission ("SEC"), so an investor has very limited information as to what kind of business they operate, who their management is, and their financial condition.This limited information about a company can lead to fraudsters spreading false information and misleading statements so that they can inflate cheap stock prices and then sell for a profit.This is sometimes referred to as pump-up-schemes.In contrast, large companies file reports with the SEC that an investor can get from the SEC website and do their research. Professional stock analysts regularly write and research larger public companies and their reports can easily be found in newspapers and on the internet.

The SEC has toughened its strategies against the wrongdoers, or fraudsters. On May 14, 2012, the SEC suspended the trading activity for 379 microcap companies suspected of providing false and misleading information to investors. The SEC has the authority to suspend trading in any stock for up to 10 days when their information is believed to be inaccurate or unreliable. The suspension of this number of companies marks the most companies suspended in the SEC's history. The companies suspended were dormant and delinquent in their public disclosures. The last time the SEC had a mass suspension of companies was in 2005, when it suspended the trading of 39 companies.

"Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers—the tools by which they ply their illegal trade," said Robert Khuzami, Director of the SEC's Division of Enforcement. This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors.

Stock manipulators have bought shell companies in recent times for as much as $750,000 to take control of dormant companies so they can manipulate information to affect stock prices. The plan is to encourage investors to go on a frenzy buying stocks as a result of false information, such as falsified financial information. This temporarily drives the stock price up, and the fraudsters sell off the stocks, making huge profits while creating future losses for unsuspecting investors.

"This mass trading suspension is an effective and novel way for the SEC to neutralize potential threats to investors." Said Chris Ehrman, Co-National Coordinator of the SEC's Microcap Fraud Working Group. "With the ability to leverage staff expertise throughout the agency's offices and divisions, the Working Group is uniquely positioned to take on risk-based matters like these and focus resources where are they are needed the most."

To avoid being the victim of this kind fraudulent scheme, before making a decision about investing in a microcap company, obtain as much information as possible about the company. As an investor, you should do research online; visit the SEC website, and the company's website. As a potential investor, you can also call the state securities regulators to determine whether the regulators have information about the company and the management. If you are suspicious of the company for any reason, you should call your state regulators, or the SEC immediately with all the details. You may have come face-to-face with a scam.

Kim Lamplough contributed to this article.

 
 
 
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