Penny Stock Scams (South Florida Business Journal)

SEC targets 379 shell companies in fraud-fighting initiative


South Florida Business Journal
Date: Monday, May 14, 2012, 2:44pm EDT


The Securities and Exchange Commission on Monday suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes, the agency said in a press release.

The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.

South Florida has traditionally been one of the nation's hotbeds when it comes to microcap shell companies, which are often touted via investment newsletters and telephone sales operations. The SEC has a link to a list of the companies whose trading has been suspended, but the list did not have a breakdown of where the companies are located.

Earlier this month, the SEC suspended the trading of two companies based in Fort Lauderdale and Miami, saying there was an attempt to manipulated the market. In April, FBI Director Robert Mueller in a Miami speech said corporate and securities fraud were a big problem for South Florida's business community.

In a pump-and-dump, perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company, the SEC said. After purchasing shares for a low price and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

While the price gains are often less than a dollar per share, the schemes can generate millions in revenue through dramatic percentage increases in share prices.

"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 will pay as much as $750,000 to assume control of a shell company in order to pump and dump the stock for illegal proceeds to the detriment of investors, the SEC said. But with this trading suspension's obligation to provide updated financial information, these shell companies have been rendered essentially worthless for scam artists.

An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud, the SEC said.

The SEC's previously largest trading suspension was an order in September 2005 that involved 39 companies. The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.