Transparency Bootcamp – Custodianship Disclosures In Reverse Mergers
Recently custodianship and/or receivership proceedings involving publicly traded companies have been in the spotlight because of the increasing number of fraudsters seeking these appointments so that they can create their own personal inventory of public shell companies for reverse merger transactions. Because custodians are fiduciaries all states impose disclosure obligations on any person seeking appointment as a custodian. As explained below, fraudsters with disciplinary history go through considerable lengths to conceal their backgrounds. Custodianship proceedings involving public companies reveal a string of custodians concealing their background in order to obtain appointments, a felony in most jurisdictions. The non-disclosures include tax liens, SEC and state enforcement actions and FINRA proceedings. The business of creating public shell inventory is so lucrative that at least one custodianship applicant changed his name to conceal information that would be revealed by FINRA’s brokercheck.
Fraudsters commonly pursue these actions in Colorado, Florida, Delaware and Nevada where a majority of publicly traded companies are domiciled. This blog post focuses on the disclosure requirements of custodians seeking appointments in the state of Nevada.
Nevada Revised Statute (“NRS”) Section 78.347 sets out the disclosure obligations for persons seeking appointment as a custodian of a publicly traded company. The section requires expansive background disclosures and requires, among other things, that a custodianship applicant provide a detailed list of all previous custodianship applications in any jurisdiction that were filed by the applicant or its affiliate.
The statute requires full disclosure of any and all previous criminal, administrative, civil or National Association of Securities Dealers, Inc., or Securities and Exchange Commission investigations, violations or convictions.
Under the foregoing section, applicants must provide disclosure of matters for themselves as well as their affiliates. Fraudsters seeking to avoid disclosure of background information cannot do so by using by changing their name, or hiding behind a corporate ego or affiliate. Under the statute there is no time limit for the look back period. NRS 78.347(2) is broad and encompasses activity other than securities related matters including actions by state banking or franchise authorities and the Internal Revenue Service.
The full text of NRS 78.347(2) is below.
An applicant on whose behalf a stockholder has applied to the district court for a custodianship shall provide the following information, along with an affidavit attesting that such information is true and correct, to the district court:
(a) A detailed list of all previous applications to a court in any jurisdiction for a custodianship of a publicly traded corporation that were filed by the applicant or an affiliate or subsidiary of the applicant.
(b) If an application listed in paragraph (a) was approved, a detailed description of the activities performed during the custodianship by the applicant or the affiliate or subsidiary of the applicant.
(c) A description of the current corporate status and business operation of any publicly traded corporation for which the applicant and any affiliate or subsidiary of the applicant has held a custodianship.
(d) A full disclosure of any and all previous criminal, administrative, civil or National Association of Securities Dealers, Inc., or Securities and Exchange Commission investigations, violations or convictions concerning the applicant and any affiliate or subsidiary of the applicant.
(e) Evidence of reasonable efforts by the applicant to contact the officers and directors of the corporation for which the custodianship is sought.
(f) Evidence of a demand by the applicant to the officers and directors of the corporation for which the custodianship is sought that the corporation comply with the provisions of chapter 78 of NRS and that the applicant did not receive a response.
NRS 78.347(2) demonstrates that the state courts in Nevada do not take custodianship appointments lightly and prior to granting such appointments applicants must undergo considerable scrutiny about their background. Unfortunately, until someone undertakes a review of a custodian’s appointment and the background information provide, false statements in the application process will go undetected and unreported to proper authorities. Under federal and state securities laws, fraudulent statements made in connection with the purchase or sale of a security constitute securities fraud. We expect to see an increase in state regulators focusing on this type of conduct using the false affidavits and fraudulent pleadings as a basis for securities fraud and other fraud based actions.
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