Why Operation Shell Expel Gets an F
Published on: Nov 5, 2015
Between January of 2000 and present, the Securities and Exchange Commission (the “SEC”) has suspended or halted thousands of publicly traded companies under its highly publicized agenda known as Operation shell Expel. Many were dormant penny stock issuers suspended to prevent corporate hijackings by fraudsters setting up receivership or custodianship shells. Others were penny stock issuers engaged in massive pump and dump schemes. Some of the suspended companies had been dormant for almost a decade. How did all of these dormant companies manage to continue trading, albeit infrequently, for so long?
Recent cases reflect that many of these shells are under the control of jammed up government informants (including lawyers) with sealed dockets. Could there be any other explanation for why the SEC and FBI have taken no action against these participants for their obvious violations of the securities laws? Nevada state court judges have expressed outrage at the practice of creating shells using fraudulent custodianship proceedings and made referrals to the Justice Department, yet the SEC has failed to take any action against the fraudsters involved — many of which have profited handsomely from their illegal activity. Similar inaction on the part of regulators was demonstrated in the recent SEC case against Guy M. Jean Pierre. It was only after the Florida Bar proceeded in a grievance against Jean Pierre surrounding his forgery of hundreds of legal opinions for shell companies, that the SEC pursued that matter. It is unfathomable that an attorney would be found to have forged hundreds of opinions covering billions of shares of stock yet not be criminally charged.
What the SEC fails to tell the public is that many of the shells they are suspending were put into the market place by government informants.
What some call “zombie tickers” are familiar features of the penny landscape particularly when custodianship shells are present. Zombie shells that the SEC fails to suspend are always vulnerable to fraudsters looking to take them over and create custodianship shells and engage in other forms of corporate hijackings. Custodianship and receivership shells are a facade designed to create smoke and mirrors. Custodianship and/or receivership hijackings involve fraud because the hijackers lie in pleadings and they lie to state court judges in order to obtain control of the dormant public vehicles. Investors in these vehicles never have the benefit of knowing that these entities were illegally taken over to create shell inventory.
Investors in the reorganized hijacked entity are not the only victims. The original shareholders of the dormant companies are victims because their interest is eliminated through reverse stock splits or other restructurings. Legitimate small businesses seeking to have their shares publicly traded are led astray by complicit attorneys who recommend these vehicles because they hold an inventory of hijacked shells.
Dormant public shell hijackings have been around for more than a decade. This raises an important question. How could the SEC and criminal authorities allow hundreds of public companies to be taken over by a handful of hijackers who knowingly sell them to promoters for use in pump and dump schemes? Corporate hijackings have plagued the microcap markets for years. The SEC and Justice Department have selectively pursued actions against some hijackers while completing missing the ball where custodianship and/or receivership actions have been employed.
In one SEC news announcement concerning trading suspensions, Robert Khuzami, director of the SEC’s Division of Enforcement stated, “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.”
In the last two years, the SEC has selectively removed dormant shells from the marketplace and allowed hundreds to remain. But why not deal with all of them? OTC Markets’ No Information tier would be an excellent place to start. Why is the SEC leaving these shells out there? Currently there are 3,067 completely dark companies assigned to the OTC Markets’ No Information tier. Nearly all are vulnerable to hijackers. Anyone considering a reverse merger into a public shell company whose control was obtained through a custodianship or receivership action should understand that he could become embroiled in future civil and criminal actions involving the hijackers as well as the issuer, if he completes a transaction with a hijacked shell.
Any issuer that previously engaged in a reverse merger with a custodianship and/or receivership shell should make appropriate public disclosures of the state court proceeding, including the details of all securities transactions and payments made in connection with the reverse merger and of the securities lawyers involved. Anyone purchasing such companies should review all relevant pleadings, including affidavits, and provide these as exhibits to their SEC and OTC Markets filings to satisfy the anti-fraud provisions of federal and state securities laws. Issuers should also confirm all corporate matters described in the custodianship and/or receivership action, including contacting the former board of directors and shareholders and obtaining minutes of meetings. More than once a hijacker has sworn in verified pleadings that a company’s “board of directors was deadlocked”—a situation creating grounds for a custodianship application—when in fact there was only one board member. Investors losing money in pump and dump schemes involving custodianship shells should report the matters to the SEC and if they fail to investigate, investors should contact the SEC’s Office of the Inspector General either directly or through their legal counsel.
A word of warning to issuers going public. Beware of penny stock attorneys selling shells they may be working under the instruction of regulators to entrap investor relations providers and unsuspecting companies seeking public company status. It has yet to be seen how state bar associations will welcome the bar grievances surrounding the role of securities lawyers in this activity.
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