SEC Suspends Trading In 379 Microcap Companies In Fraud Crackdown

by Robert Wilcox:

The Securities and Exchange Commission said it suspended trading in 379 dormant companies–the most companies the regulator has ever suspended in one day–in an effort to prevent the stocks from being hijacked by fraudsters.

The SEC’s previous largest trading suspension was an order in September 2005 that involved 39 companies.

The suspensions are part of the SEC’s ramped up efforts to crack down against fraud, such as pump-and-dump schemes, involving microcap shell companies that are dormant or delinquent in their public disclosures. Microcap firms typically have limited assets and low-priced stock that trades in low volumes.

An initiative called Operation Shell-Expel by the SEC’s Microcap Fraud Working Group used various agency resources to scrutinize microcap stocks nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that could be used for potential fraud.

“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.”

A pump-and-dump scheme is among the most common types of fraud involving microcap companies, the SEC said. Perpetrators will tout a lightly traded microcap stock through false and misleading statements. After purchasing low and pumping the stock price up by creating the appearance of market activity, they dump the stock to make a profit.

SEC Attacks Nearly 400 Pink Sheet Shells

By David Feldman at 14 May, 2012

This morning, the SEC announced a huge suspension in trading of 379 non-reporting shell companies, the largest suspension in the SEC’s history, according to their press release. Apparently, the companies will not be permitted to be quoted again until they provide current information, including financial information. As a practical matter, for most of these pink sheet shells which do no SEC reporting, they will become nearly worthless.

The SEC says it took the action regarding these shells “before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes,” according to the release.

I will be analyzing the release, and the 73-page suspension order and will give you more information thereafter. At least on first blush there is no suspension of shell companies that are SEC reporting and current in their filings. But here is the first major shot across the bow by Chris Ehrman’s Microcap Fraud Working Group in the SEC’s Division of Enforcement.

I have looked at the rest of the SEC’s released information about the temporary 10-day suspension in trading of 379 shell companies trading on OTC Link (operated by OTC Markets). A few tidbits (I am saving commentary for now):

  • The SEC dubbed the plan “Operation Shell-Expel.”
  • The head of SEC Enforcement said shells are like guns are to bank robbers, a tool for bad guys.
  • They say shell operators pay as much as $750,000 for control of a shell but we haven’t seen one go for that much since 2008. Best prices now are around $350,000, and not for the non-reporting shells they suspended, which go for more like $100,000 to $150,000 currently.
  • In order to trade again each shell will have to apparently have its market maker file a new Form 211 which needs to be approved by FINRA and contain information including the company’s most recent balance sheet, profit and loss statement and retained earnings statement.
  • Some “unsolicited” trading may be permitted while waiting for the new Form 211 after the 10-day suspension.

None of the trading suspensions affect Form 10 shells or shells which are current in their SEC reporting.