SEC Trading Suspensions 101 l Securities Lawyer 101
Over a year ago, the Securities and Exchange Commission (“SEC”) in an initiative known as Operation Shell-Expel, the Securities and Exchange Commission (“SEC”) suspended the trading in 379 shell companies in an effort to prevent the companies from being hijacked by fraudsters and used in reverse mergers scams. Over the last few weeks, the SEC has suspended an additional 75 issuers. The trading suspensions sent brief shock waves through reverse merger Pennyland.
Despite the initial shock to shell brokers, they continue to peddle their shells many of which have been the subject of illegal custodianship and/or receivership actions.
According to the SEC, pump-and-dump schemes are among the most common types of fraud involving microcap companies. A pump and dump operation can take several forms, but the result is always the same: the stock rises briefly, and then crashes and burns. In some cases, the perpetrators purchase shares at low prices, a practice known as “frontloading”, and then pump the stock price by issuing false and misleading statements to the public. They sell into their own hype. That is called “scalping”. Both frontloading and scalping are illegal. While amateurs can and do pump and dump, these schemes are usually run by professional promoters. They may work with company insiders or affiliates. In every case, a professional pump and dump promotion is paid by people with large positions who want to liquidate.
Robert Khuzami, director of the SEC’s Division of Enforcement explained, “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. 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.”
The SEC may order a trading suspension if it feels one is warranted to protect investors and the public interest. The federal securities laws generally allow the SEC to suspend trading in any stock for up to ten trading days. When the suspension expires, the issuer will likely find that the Depository Trust Company (“DTC”) has supended electronic trading and placed a Global Lock or DTC Chill on its securities.
Circumstances that might result in an SEC trading suspension include:
♦ A lack of current, accurate, or adequate information about the issuer, or if the issuer is delinquent in its SEC filing obligations;
♦ Questions about the accuracy of publicly available information, including information in the issuer’s SEC or OTCMarkets filings, press releases, research reports or other public statements;
♦ Questions about trading including potential market manipulation and the ability to clear and settle transactions, as well as doubtful insider transactions.
Even though the trading suspension lasts only ten days, when it ends, the company’s stock does not return to normal trading. That is because by virtue of the suspension, it has lost compliance with SEC Rule 15c2-11, which means broker-dealers may not solicit investors to buy or sell the suspended company’s stock until certain requirements are met. Before soliciting quotations or resuming quotations, a market maker must file a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) representing that it has satisfied all applicable requirements, including those of Rule 15c2-11 and FINRA Rule 6432. Among other things, Rule 15c2-11 requires broker-dealers to review and maintain certain documents and information about the company, including in certain cases:
♦ the company’s state of organization, business line, and names of certain control affiliates;
♦ the title and class of the securities outstanding; and
♦ the company’s most recent balance sheet and its profit and loss and retained earnings statement.
If there are continuing regulatory concerns about the company, its disclosures, or other factors such as a pending regulatory investigation, a Form 211 application may not be approved. Limited or “unsolicited” trading can occur in a stock that has been subject to a trading suspension after the suspension ends but before a Form 211 is approved, which allows investors to trade the stock when a broker or adviser has not solicited or recommended the security. During this time- which usually lasts forever- the stock will trade on what is known as the Grey Market. Most formerly- suspended stocks lose between 60% and 80% of their value when they resume trading on the Greys, and over a period of weeks or months become extremely illiquid.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855