Microcap Fraud Crackdown: Proactively Suspends Trading in 255 Dormant Shell Companies

February 3rd, 2014
in econ_news, syndication

from the Securities and Exchange Commission (SEC)

The Securities and Exchange Commission today announced the latest actions in its microcap fraud-fighting initiative known as Operation Shell-Expel, suspending trading in 255 dormant shell companies ripe for abuse in the over-the-counter market.

Follow up:

Pump-and-dump schemes are among the most common types of fraud involving microcap companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low 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.

Since Operation Shell-Expel began in 2012, the SEC Enforcement Division’s Office of Market Intelligence has been cleaning up the microcap marketplace by scrutinizing penny stocks nationwide and identifying clearly inactive companies. This has enabled the SEC to proactively suspend trading in several hundred dormant shell companies before fraudsters have an opportunity to manipulate them. Said Andrew J. Ceresney, director of the SEC Enforcement Division:

A frequent element in pump-and-dump schemes has been the use of dormant shells. Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.

Today’s massive trading suspension involves dormant shell companies uncovered in 26 states and two foreign countries. Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it is still operational. It is extremely rare for a company to fulfill this requirement, so the trading suspension essentially renders the shells worthless and useless to scam artists. Margaret Cain, a microcap specialist in the Office of Market Intelligence stated:

Policing this sector of the markets can be a challenge. There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expelis both economical and efficient as the SEC continues its commitment to preventing microcap fraud.

In addition to Ms. Cain, the Operation Shell-Expel initiative has been led by William Hankins, Robert Bernstein, Victoria Adraktas, Jessica P. Regan, Leigh Barrett, John Gibbons, and Megan Alcorn in the Office of Market Intelligence with assistance from the Enforcement Division’s Delinquent Filings Group. The SEC appreciates the assistance of the FBI’s Economic Crimes Unit.

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