Amended Rule 15c2-11 is Bad News for Shell Vendors

Though nearly two months have passed since compliance with the Securities and Exchange Commission’s amended Rule 15c2-11 became mandatory on September 28, 2021, the OTC marketplace is still reeling from the effects of its implementation. The new rule requires all OTC issuers to make “current information” available to investors and the general public. For most, that means qualifying for OTC Markets’ Pink Current Info tier, or, at a minimum, its Limited Information tier. 

Results have been dramatic. Thousands of penny stocks have been sent to OTC Markets’ “Expert” tier, where they have no published quotations. U.S. broker-dealers are not allowing their customers to purchase them, though liquidating trades are permitted. While this serves to protect genuine investors, as the rule intended, it’s a serious obstacle for those penny players interested in the kind of speculation that can result in large gains (or losses). 

Not so long ago, much of that speculation was fueled by “reverse merger plays,” in which specialist shell vendors would seek custodianship of public shell companies that had been abandoned by management in their states of incorporation. Once a petition for custodianship had been granted by a local court, control of the shell would pass to the shell vendor. He would then reinstate the company’s corporate charter—or, if it had been abandoned many years earlier, “revive” it—and pay delinquent fees to the Secretary of State. He could then present himself to the shell’s transfer agent. His ultimate goal would be to find a buyer for the shell. The buyer would be the owner of a private company who wished to take his business public through a reverse merger transaction. 

The amended Rule 15c2-11 has made all that far more difficult to accomplish. One of the objects of the new rule was to reduce the number of shell companies in the OTC market. The SEC has long realized that dormant shells are often purchased by individuals who intend to use them in pump and dump operations or other kinds of manipulative schemes. In the hope of putting a stop to that, the new rule specifies that a shell company can only continue to trade for 18 months following its initial quotation by a market maker. If it is still a shell after that time, it will no longer qualify for public quotation. In other words, OTC shells would be subject to some of the limitations imposed on special purpose acquisition companies (SPACs).

That was very bad news for the shell vendors. Some seem to have digested it and found new ways to make money; others have not. One of the latter is Benjamin Berry, who runs a company called Synergy Management Group. Synergy is, according to its website, located in Chicago and Minneapolis. Berry says of his company: “We are specialists that strive to create value for shareholders of distressed public companies.”

Synergy Management Group

Synergy Management is difficult to trace. Although it offers a Chicago phone number, it isn’t registered in Illinois. Nor can it be found in Minnesota. No physical address is given on the website. “Benjamin Berry” is a surprisingly common name, and our Berry appears not to have a profile on LinkedIn. Berry and his company appear to be fairly new to the shell business, but it’s impossible to say when he began working as a shell vendor without more precise information. For what it’s worth, the Synergy Management Group website domain was registered in May 2019.

Unlike most of his peers, he files custodianship actions in many states. One of them is Delaware. As of the beginning of April 2021, he had nine active petitions before the Chancery Court. Those companies were EVCI Career Colleges Holding Corp (EVCI), Big String Corp (BSGC), International Card Establishment, Inc. (ICRD), Avistar Communications Corp (AVSR), AVP, Inc. (AVPI), Solar Energy Initiatives, Inc. (SNRY), Colombia Energy Resources, Inc., (CERX), indiePub Entertainment, Inc. (IPUB), and Forum Mobile, Inc. (FRMB). For the purposes of this story, the one we’re chiefly interested in is FRMB.

Of them, SRNY and EVCI trade as Pink Current Information stocks at OTC Markets; all the rest are on the Expert tier and do not have published quotations. For EVCI, Berry was able to persuade OTC Markets to give him access to its Disclosure and News Service at an undisclosed but fairly recent date. On September 10 of this year, he posted annual reports for 2019 and 2020 at the OTCM website, along with quarterly reports for the periods ended 3/31/2021 and 6/30/2012. Three days later, an attorney opinion letter from Jonathan Leinwand appeared, and on November 9, the Q3 quarterly was posted. He was not, however, granted custodianship of the EVCI shell by the Delaware court. On June 30, he explained on his website: “I am talking with the last director of EVCI – EVCI Career Colleges Holding Corp., Philip Getter. I have hopes to get a deal done with him.” The negotiations were ultimately successful. In all of the company’s quarterly reports filed in September, he reported a subsequent event:

On July 22nd, 2021 Synergy Management Group LLC controlled by Benjamin Berry purchased 12,875 Preferred A Shares, 6,299 Series B Preferred Stock, and 8,124 Series C Preferred Stock from GEMPH Development LLC controlled by Philip M Getter as part of a change in control. Also on July 22nd, 2021 Mr. Getter resigned as Chairman of the Board. By Board resolution Mr. Benjamin Berry was elected and agreed to serve as Chief Executive Officer and sole Board Member. Subsequently by board resolution on July 22nd, 2021 Benjamin Berry was appointed President, Treasurer, Secretary, and CFO of the company.

That was acceptable to OTC Markets, though he was required to indicate that EVCI is a shell company.

On July 12, he reported that he’d withdrawn his custodianship petition for SRNY. New management took over, and OTC Markets accepted the disclosures the new team offered.

Chancery Court

Though Berry did obtain control of one of the shells he was interested in, the Delaware Chancery Court had not obliged by granting him custodianship of any of the others. Historically, the court is wary of granting custodianship to shell vendors and has long been aware of the SEC’s concerns about possible bad outcomes. 

Synergy’s petition for custodianship of Forum Mobile was filed on May 8, 2020. The court, in the person of Vice Chancellor J. Travis Laster, handed down a memorandum opinion on March 18, 2021. The memo notes that although FRMB traded at that time on the Pink Sheets, it had “failed to maintain current, publicly available information about itself and its operations as required by the federal securities laws.” It had also failed to comply with Delaware law: “It does not maintain a registered agent within the State of Delaware, has not filed annual reports with the Delaware Secretary of State, and has not held an annual meeting of shareholders.” In addition, its status was void for failing to pay its franchise taxes.

Synergy had purchased 494,530 shares of FRMB’s stock because, Laster notes, the shares have a CUSIP, and trade over the counter, the company has value. In its petition, Synergy seeks to have Berry appointed custodian, stating that “[t]he value of the stockholders’ equity in [Forum] will increase if and when a private company brings a new and viable business to [Forum].” 

Laster is concerned about possible violations of the federal securities laws and sees the petition as “the latest instance of a recurring phenomenon. This court periodically confronts efforts by capital-markets entrepreneurs to revive otherwise defunct entities to use as blank check companies.” He cites four cases that were dealt with by the Chancery Court between 2002 and 2012; none of them worked out well for the petitioners. 

In the earliest, Clabault v. Caribbean Select, Inc., one of the petitioners was Stirling Corporate Services, LLC, which was “in the business of identifying bankrupt, voided corporations that were once publicly traded and, then, reviving and restructuring them into saleable public shells.”

Stirling had made more progress than Berry has with his own case: he succeeded in filing a conditional revival, holding a shareholder meeting, and gaining control of Caribbean’s board of directors. He then filed a proxy statement with the SEC and proceeded to find a merger candidate.

The judge who decided the case, Vice Chancellor Lamb, believed the plaintiffs had made a good case, but he failed to grant the petition. He held that:

Stirling’s petition is part of a plan to make an ‘end run’ around the federal rules and regulations governing the public trading of securities, thereby avoiding the burden or expense of complying with SEC disclosure requirements, in particular the need to file the necessary registration statement.

To drive home his point, he added in conclusion: “This court is unwilling to use its powers to assist Stirling to profit by the sale of regulatory avoidance.”

That would become a recurring theme in the other cases cited by Laster. In the fourth of these, Williams v. Calypso Wireless, Inc., heard in 2012, the court held that “using a defunct Delaware corporation that happens to retain a public listing to evade the regulatory regime established by the federal securities laws is contrary to Delaware public policy.”

In response, Synergy attempted to show that what it intended to do was procedurally different from what Stirling had tried to do in Clabault and asserted that it has no intention of evading the federal securities laws. But as Laster saw it, the argument missed the point, which is that in all the earlier instances cited, Delaware disagreed. Synergy also argued that Clabault and the other cases under discussion were old, and therefore could not be construed as reflecting the current views of the SEC. After all, the Commission had never tried to argue that reverse mergers were illegal.

Following his discussion of the matters at issue, Laster considered how to go forward. In Calypso Wireless, Vice Chancellor Lamb had appointed a receiver to consult with the SEC and determine “whether steps should be taken to halt public trading in Calypso’s shares.” The Commission did, in fact, initiate an administrative proceeding to revoke the issuer’s registration on March 1, 2012. CLYW chose to settle quickly, and its registration was revoked on March 14, 2012. The Delaware court—and perhaps the petitioner who requested custodianship in that year—was evidently unaware that CLYW had been suspended on June 7, 2011, along with 16 other stocks. The reason given for the suspensions was “questions regarding the adequacy and accuracy of information about the companies, including their assets, business operations, current financial condition and/or issuances of shares in company stock,” a phrase familiar to anyone who’s followed penny stock suspensions over the years.

Although Lasker felt the appointment of a receiver would not be appropriate in the Forum Mobile case, he did believe it would:

…be helpful to have input from the SEC and the benefit of adversarial briefing on the petition. That is particularly true because Synergy and another firm have filed a raft of these petitions. Having input from the SEC also will provide a direct answer to the question of whether Delaware’s concern about creating a state-law bypass around the federal securities laws governing stock offerings has become stale, as Synergy argues.

Therefore he determined to appoint an amicus curiae. His choice was Mark J. Gentile, a local attorney who had served as receiver in Calypso Wireless and so had had experience discussing the issues at hand with the SEC. 

The SEC Weighs In

Benjamin Berry was naturally aware of Gentile’s appointment. In late May, he called the amicus curiae and asked when he was likely to comment on the case. Three weeks later, Gentile posted a letter to the court, explaining that he was awaiting a response from the SEC but had no idea when to expect it. 

The regulator took its time. It was not until October 29 that Jeffrey Berger, an SEC Senior Litigation Counsel, wrote a long letter to Vice Chancellor Lasker and Jeremy Anderson, the attorney representing Synergy, in response to Lasker’s March 18 opinion. At the outset, he made clear that the SEC would take no position on any issues having to do with Delaware law.

Berger is careful to note at the outset that reverse mergers are not, as he put it, “per se illegal under the federal securities laws.” Quoting from the amended Rule 15c2-11, he adds that the lack of current and public information can pose a significant risk to investors “because it may prevent them from estimating return probabilities and generative positive returns” and “can contribute to incidents of fraud and manipulation by preventing retail investors from being able to counteract misinformation.” He also points to one SEC and several academic studies of OTC issuers that conclude a lack of information leads to illiquidity, negative returns, and fraud. He also notes that such stocks are often manipulated in pump and dump schemes and illegal promotions. In sum, the SEC disapproves of reverse mergers and recently “has promulgated several rules as a means to prevent fraud and manipulation that can arise because of the absence of current information about such issuers.”

He then explains what everyone knows: that companies like Forum are not required to file an initial registration statement with the SEC and are not obliged to make periodic reports. The company’s status has, however, changed since compliance with the new Rule 15×2-11 became mandatory. Now, instead of trading as a Pink No Information stock with quotes, it’s been demoted to OTC Markets’ Expert tier, where broker-dealers “can only publish unsolicited quotations… which are not publicly available.” FRMB also has a “Caveat Emptor” flag, intended to warn investors that “there is a public interest concern about the company.”

Berger goes on to say that although Forum was once a reporting company called Adsero Corp, it ceased to be one more than 10 years ago. Adsero, once known as Reink Corp, was located in Quebec, Canada. By the time it filed its last quarterly report in August 2006, it was floundering financially, under pressure from its creditors, and engaged in litigation with former officers. By November of the same year, it had been removed from the OTCBB to the Pinks for failure to file its required financial reports. It swore it intended to catch up but never did. In May 2008, it filed a Form 15-12G to terminate registration. A few months later, it changed its name to Quantum Telecom (QTMI). In 2008, QTMI posted a number of disclosures at OTC Markets and then moved them all to the “inactive” file, eventually replacing them with new active reports. By 2009, it had given up offering information to the public, let alone doing any real business. On October 2, 2012, it officially changed its name to Forum Mobile and its ticker to FRMB. It did not, however, resume making disclosure at OTC Markets. There could be innumerable skeletons buried in the Forum midden heap.

The SEC litigator wraps up his letter by returning to the provisions of the amended Rule 15c2-11 and the difficulties they present for issuers like FRMB that have no current information. The minimum requirement for compliance is a balance sheet no older than 16 months and a complete list of company insiders. Forum would have difficulty providing that in the near future and so could not be quoted. 

As Berger said at the beginning of his letter, it isn’t his place to offer an interpretation of Delaware law, so he makes no recommendations to the Chancery Court. Neither does he paint reverse mergers in a favorable light. On the contrary, he goes out of his way to describe the disadvantages and dangers they pose for investors. It seems likely to us that the Delaware court will continue on the path it set out on nearly 20 years ago and will disallow the revival of Forum on the grounds that it remains unwilling to use its powers to assist shell vendors to profit from regulatory avoidance.

It will be interesting to see whether other state courts, most of which rubber stamp custodianship petitions, will take note.


For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit  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.

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