Corporate Hijackings In Going Public Transactions
Corporate hijackings, also known as corporate identity theft, of public shell companies have been a problem for more than a decade. Hijackings are increasingly used by fraudsters to acquire control of publicly traded shell companies and then to sell them to unsuspecting private companies seeking to go public. Many observers ask why anyone would purchase these hijacked vehicles. First, most purchasers are not aware that the vehicles are hijacked. More importantly the transactions are always blessed by a complicit lawyer who provides assurances to the buyer as well as investor relations firm’s involved that the transactions are in compliance with the securities laws. The lawyers act as the gatekeeper to the transactions providing guidance to the parties, rendering legal opinions and holding escrow for the illegal sale of the hijacked shell company.
A common factor in all corporate hijackings is the complicit securities lawyer who submits fraudulent documents to state courts, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”) in order to conceal the scheme and/or obtain approval of the restructured hijacked entity. Without the complicit attorneys, it would be impossible for these schemes to occur.
In recent cases, we have observed complicit attorneys actively involved in corporate hijackings with family members and associates. These lawyers seek to peddle the hijacked vehicles to their own law firm’s unsuspecting clients seeking to go public. In these instances, the complicit attorney holds escrow and provides legal guidance and credibility to the reverse merger transaction. Unfortunately, many times the transactions are designed with illegal free trading shares and investor relations services set up by the complicit lawyer. Upon completion of the transaction, unsuspecting management finds themselves embroiled in actions by the Justice Department or SEC. Recent cases demonstrate that the middlemen and management have been charged in connection with these vehicles but the most complicit parties, the shell hijacker and complicit lawyers have gone uncharged.
Recent SEC cases against hijackers have revealed a myriad of victims. Investors are the most obvious, but not the only victims of these schemes. Private companies seeking public company status are also harmed, as is the legitimate management of the hijacked issuer. Recent cases show that these hijacked entities have been used as vehicles in manipulative schemes that have resulted in multiple criminal and civil actions involving stock promoters and investor relations firms.
Corporate hijacking and reverse merger schemes can be traced back to many of the best known frauds in the penny stock markets. The bad actors behind a number of these schemes can be linked to low level brokers and associates appearing in enforcement cases from the early 2000s. Often times, financial message boards openly tout the criminals behind these schemes.
The questions many ask are: when will the corporate hijackers be held accountable for their actions and why are these individuals allowed to continue operating in the securities industry despite their dubious pasts? For the SEC to charge the buyers of these vehicles in schemes like Ammogear and then allow the corporate hijackers to go unpunished is the equivalent of creating a disease and then bragging about finding a cure.
The hijacked vehicles are inventoried, (illegally) restructured and openly advertised for use in scams. Often these vehicles are packaged with the services of the complicit attorney as part of the turnkey solution. The easiest way to spot a scam vehicle is to consult FINRA’s Broker Check, looking up parties associated with the vehicle who may have been registered representatives at one time. Unfortunately, because Broker Check gives an individual’s name as registered with FINRA, it fails miserably in instances where an individual undergoes a simple name change to avoid discovery of his or her disciplinary background. The effect is exacerbated when a complicit attorney actively conceals disclosure of the individual’s disciplinary history.
Any company seeking public company status should exercise extreme caution when considering a reverse merger with an entity that has undertaken multiple name changes, reverse stock splits, changes of domicile, receivership or custodianship actions or has received help from self proclaimed “turnaround” experts.
The Private Company Seeking Public Company Status
It is relatively easy to locate information about a public company using EDGAR, OTC Markets filings, Secretary of State websites and corporate filings, company websites, and business and other directories. Using these sources to locate public shell companies for reverse merger transactions, fraudsters are able to determine a public company’s corporate status including whether it is active or inactive, its ticker symbol, identify present and former officers and directors as well as its contact information. Private companies who fall prey to these fraudsters fail to recognize that it is less costly and time consuming to go public by filing a registration statement with the SEC for a direct public offering. The private company assumes the liabilities of the hijacked shell and possible SEC Enforcement actions even when it is not complicit in the hijacking.
How the Corporate Hijackers Gain Control of the Public Shell
Using the information described above, hijackers can determine if an entity’s corporate status has lapsed and when a company becomes delinquent in its SEC, OTC Markets and Secretary of State corporate filings, making it an easy target. Using easily obtained public information, fraudsters have hijacked literally hundreds of companies and/or their stock symbols and sold those companies to private entities seeking to go public.
In the state of Florida, some hijackers file verified pleadings under Florida Statute 607.1430 and 607.1434, falsely stating that the public shell’s directors are deadlocked and its shareholders are unable to break the deadlock. In reality, there is no deadlock. We have reviewed numerous hijacking cases brought under Florida law where corporate hijackers have falsely represented the board of directors was deadlocked when the corporation had only one director! Often by the time the hijackers are caught by management, they have undertaken various actions that cause irreparable harm to the corporation, including massive dilution to the legitimate shareholders. The key in most corporate hijackings is that there must be a complicit securities lawyer to pull off the scheme. The complicit lawyer submits name changes, corporate reorganizations and other documents to FINRA and the SEC to cover up the scheme. Upon identifying the hijacking target, fraudsters may engage in some or all of the following in order to obtain control of the public shell company:
♦ obtain forms from the relevant Secretary of State website and pay a nominal fee to reinstate the dormant entity and change its officers, directors and contact information to that of the hijacker or its nominees;
♦ file a state custodianship or receivership action where the entity is formed using pleadings that falsely state among other things, that a custodian or receiver selected by the hijackers will take actions to benefit the then existing shareholders;
♦ change the hijacked entity’s corporate name and/ or create a new entity with the same or a similar name, often in a different jurisdiction;
♦ reverse split, restructure, reorganize and/or change the jurisdiction of the hijacked entity by merging it into the newly formed entity to conceal its true identity;
♦ issue shares to the hijackers, receiver or custodian and nominees, which substantially dilute the then shareholders;
♦ sell the hijacked entity to a private company seeking to be publicly traded for use in a reverse merger transaction with the proceeds of the sale being used to compensate the hijacker and the custodian or receiver;
♦ notify the Financial Industry Regulatory Authority (“FINRA”), the company’s transfer agent and CUSIP Services of the reverse merger, new management and/or reorganization of the entity; and
♦ commence making filings on the OTC Market or Edgar.
Corporate Hijackings – Warning Signs
Private companies considering a reverse merger transaction, as well as investors should look for these common red flags often found in corporate hijackings of public shell companies:
♦ changes in management of the public shell company while it is inactive or shortly after its corporate charter is reinstated;
♦ state receivership or custodianship proceedings followed by reverse stock splits and/or large stock issuances which transfer shareholder voting control;
♦ recent transfers of stock between entities or persons who received shares for services rendered in receivership or custodianship proceedings;
♦ periods of inactivity in the Secretary of State corporate records of the public shell company;
♦ reinstatement of an administratively dissolved corporate entity with the Secretary of State where the public shell company is domiciled;
♦ changes in the state of domicile of the public shell company;
♦ multiple corporations domiciled in the same state or different states with the same or similar names, which are controlled by the same person or persons;
♦ accountants, lawyers and transfer agent principals and their family members and/or employees having voting control or beneficial stock positions of the public shell company;
♦ changes of control or corporate name changes at times when the public shell company does not have an active business; and
♦ involvement of persons or entities in multiple public shell company or reverse merger transactions.
Regaining Control of the Hijacked Corporation
For legitimate shareholders and management, it is timely and costly to regain control of a hijacked entity. The hijacked entities are often used in pump and dump schemes by the hijackers, causing the private company purchasers to become embroiled in SEC investigations and the public entity to have trading suspended by the SEC, or its securities subjected to DTC chills and/or global locks.
If a private company is willing to expend the time and resources to become public it should do so the proper way, by filing a registration statement with the SEC and conducting an underwritten or direct public offering, thus avoiding the growing risks and new requirements involving reverse merger issuers. Those risks include becoming involved with corporate hijackers.
For more than ten years our founder, Brenda Hamilton, has assisted shareholders and managements regain control of their publicly traded companies, rescind unauthorized transactions and report illegal corporate hijackings, securities issuances and/or transfers to the Federal Bureau of Investigation, the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
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