Reverse Mergers l Corporate Hijacking Scams l Securities Lawyer 101
Corporate hijackings of public shell companies–also called corporate identity theft–has been around for more than two decades. The public companies taken over in hijackings have become a valuable assets for shell peddlers (frequently securities lawyers & accountants) seeking reverse merger companies for their clients. They have also become a new target for the SEC.
In the past few years the SEC has suspended more than 1700 public companies to prevent the vehicles and/or their stock symbols from being hijacked by fraudsters.
Recent cases brought by the Department of Justice Department and the SEC against hijackers have unraveled a myriad of hijacking schemes varying in sophistication and featuring a variety of participants. The common element in these hijackings is the reverse merger transaction.
The Corporate Victim in Hijackings Used in Reverse Mergers
It is relatively easy for shell brokers to obtain information about a dormant public company using Edgar, OTCMarkets filings, Secretary of State websites, company websites, and business and other directories.
Using these sources to locate public shell companies suitable for reverse merger transactions, fraudsters can determine a public company’s corporate status—whether it is active or inactive—its ticker symbol, present and former officers and directors and its contact information. Private companies that fall prey to these people fail to realize it is less costly and time consuming to go public by filing a registration statement with the SEC than to pay as much to go public and take the risks associated with a reverse merger transaction.
How Corporate Hijackers Take Over Companies for Reverse Mergers
Using the information they’ve gathered, hijackers can determine whether an entity’s corporate status has lapsed and when a company becomes delinquent in its SEC or OTCMarkets filings, making it an easy target. Fraudsters have hijacked literally hundreds of companies and/or their stock symbols and sold them to private companies seeking to go public in reverse mergers.
In the state of Florida, some hijackers file bogus 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 that the board of directors of a particular company was deadlocked when in reality the corporation had only one director! Often by the time the hijackers are caught by management, they have engaged in various acts in furtherance of a reverse merger transaction that cause irreparable harm to the corporation. These acts may include massive dilution to legitimate shareholders.
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 to be used in a reverse merger:
♦ 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 beneficial to 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 existing 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, 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 l Reverse Merger l Red Flags
Private companies considering a reverse merger transaction and potential investors in reverse merger companies should look for these common red flags, which may indicate a hijacking:
♦ 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;
♦ a change or multiple 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 Used in a Reverse Merger
For legitimate shareholders and management, it is time-consuming and costly to regain control of a hijacked entity. Hijacked companies are often used in pump and dump schemes, causing the private company purchasers to become embroiled in SEC investigations and the public entity to be subject to SEC trading suspensions, and its securities subject to DTC Chills and/or global locks.
A company 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, thereby avoiding the growing risks and new regulatory threats associated with reverse mergers.
For more than 8 years our founder, Brenda Hamilton, has assisted shareholders and management to 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, Securities and Exchange Commission and 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