Dead Stock Walking | SEC Trading Suspensions of Dormant Issuers
In recent years, the SEC has issued trading suspensions and revoked the registration of numerous publicly traded companies. These SEC enforcement proceedings were brought under Section 12(j) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 12(j) authorizes the SEC to suspend or revoke registration of an SEC reporting company if it fails to comply with its obligation to file quarterly and annual reports.This authority arises from the Exchange Act, if the SEC finds that a suspension or revocation is in the public interest or necessary for the protection of investors.
The SEC staff argues that these proceedings are necessary to discourage the investing public–by which they mean potential, not current, investors–from buying securities of companies about which there is no current information.
Some critics claim SEC trading suspensions and revocations of inactive public companies are a waste of taxpayer money and SEC resources that should be spent fighting fraud.
They are wrong. There is a legitimate reason for these actions: to prevent the company from being hijacked and/or used in a pump-and-dump scheme after a reverse merger transaction.
Corporate hijackings, also known as corporate identity theft, are a growing problem. They’re used by fraudsters to acquire control of publicly traded shell companies that can then be purchased, through a reverse merger, by private companies seeking to go public. It is relatively easy to find information about a public company using EDGAR, OTCMarkets filings, Secretary of State websites and corporate filings, company websites, and business and other directories. Scammers use these sources to locate dormant public companies for reverse merger transactions. They can determine whether a public company’s corporate status is active or inactive, find its ticker symbol, identify present and former officers and directors, and get contact information. Using this readily available public information, fraudsters have hijacked literally hundreds of dormant public companies and/or their stock symbols and sold these companies to private companies seeking to go public.
The hijackers use various methods which vary in sophistication. A few are discussed below.
The “Legal” Heist
This method is a favorite of seedy–and sometimes disbarred–lawyers. It involves using an unsuspecting state court judge to facilitate the scheme. This is probably the most egregious of the frauds committed by corporate hijackers because it is an abuse of the state court system in which fraudulent statements are made to a judge. To pull it off, the seedy lawyer files bogus state court receivership or custodianship actions, which are then used to reinstate the defunct company. In these actions, the custodianship or receivership pleadings make various fraudulent representations: that the new custodians are genuine investors, that the hijackers will act in the best interests of the (defunct) company, and so on. In reality, the fraudster lawyer’s true intention is to enact a large reverse stock split to eliminate the legitimate shareholders and create a public shell.
The Lazy Corporate Hijacker
One unrefined–though simple and effective–method used by hijackers requires merely that a fraudster obtain forms from the relevant Secretary of State website where the dormant public shell is incorporated and pay a nominal fee to reinstate the dormant entity and change its officers, directors and contact information to those of the hijacker or its nominees. The corporate reinstatement falsely states the name of the fraudster or his accessories as corporate officers. The scammer need not be an attorney; anyone at all can do it. In some lax states, all that’s necessary is to go online, access the forms, fill them out, and send a check or money order. Payment by credit card is also permitted, but is perhaps not always advisable. Questions seem rarely to be asked. Should the fraudster feel in need of an accomplice to lend him a hand with the paperwork, there’s no shortage of sleazy registered agents willing to help.
The Alias Corporate Hijacker
The alias corporate hijacker copies the scheme of the lazy corporate hijacker except that the corporate reinstatement falsely lists the name of the former officer of the hijacked company as a current officer. The former officer unwittingly becomes an alias of the fraudsters. The reverse merger agreement and other corporate documents reflect the forged signatures of the dormant company’s former management.
The Hide the Pea Corporate Hijacker
The Hide the Pea Hijacker will locate a defunct company and instead of using the defunct corporate entity, it forms a new entity with the same name in another state. The hijackers then reorganize the hijacked company using a purported merger or acquisition of the defunct company into the newly created company.
Other Acts in Furtherance of the Corporate Hijacking
Fraudsters may engage in the acts below to create a seemingly appealing reverse merger candidate and hide their own actions:
♦ 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 will substantially dilute the then legitimate shareholders of the dormant public company;
♦ 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 OTCMarkets or EDGAR.
Once in control, the hijacker’s either use the public shell for their own pump-and-dump scheme or sell the hijacked entity to a private company seeking to go public in a reverse merger transaction. Naturally the proceeds of the sale are used to compensate the fraudster and his accomplices.
For more information about reverse mergers and corporate hijackings please visit:
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 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