Corporate Hijacking Insights
Corporate hijacking of public shell companies, also known as corporate identity theft, has been around for more than two decades. It is increasingly used by fraudsters to acquire control of publicly traded shell companies so they may be used in reverse merger transactions involving private companies seeking to go public. Recent actions involving corporate hijackers reflects a spotlight on a myriad of hijacking schemes varying in sophistication. Unfortunately, more often than not complicit securities lawyers play key roles in manufacturing and designing these vehicles for pump and dump and other fraudulent schemes. The most notable pump and dump schemes in the microcap market over the last decade are the product of schemes using these vehicles.
Much can go awry with these transactions, and as a result, the businesses, legitimate management and their shareholders often face financial devastation. In some instances, the reputations of management are destroyed by the hijackers. Despite the damage that corporate hijackings have caused in the microcap arena hundreds of these companies continue to function as “lather, rinse, repeat” issuers in fraudulent schemes. The business of corporate hijackings has become so rampant that traders have designed software programs to identify corporate reinstatements of dormant tickers enabling them to identify the participants in these schemes by sweeping Secretary of State websites when a dormant ticker is reinstated.
How It Works
It is relatively easy to dig up information about public companies using Edgar, OTC Markets filings, Secretary of State websites, company websites, and business and other directories. Using public sources of information, hijackers can determine whether an entity’s corporate status has lapsed, and see when it becomes delinquent in its SEC, OTC Markets and Secretary of State corporate filings, making it an easy target for a corporate hijacking. The would-be scammers are able to determine a public company’s corporate status—including whether it is active or inactive—its ticker symbol, CUSIP numbers, present and former officers and directors as well as its last known contact information. Armed with this information, they obtain new CUSIP numbers and enact name changes to hide their actions.
Legitimate small businesses purchasing these usurped and stolen vehicles fail to recognize that they are themselves at risk for an enforcement proceeding or trading suspension regardless of whether they participated in the corporate hijacking.
Using this method, fraudsters have literally hijacked hundreds of companies and/or their stock symbols and sold them to fraudsters.
Why Corporate Hijacking is a Crime
Corporate hijacking is a form of theft. Hijackers conceal the theft in a variety of ways-most often bogus custodianship and receivership proceedings using fraudulent pleadings. We have reviewed numerous hijacking cases brought under Florida law where corporate hijackers have falsely represented that the board of directors was deadlocked when in fact the corporation had only one director. Often by the time these hijackers are caught by management, they have undertaken various acts that cause irreparable harm to the corporation, including massive dilution to its legitimate shareholders.
These hijackings almost always involve complicit attorneys. In obtaining control of the public entity in this way, the hijackers inevitably commit fraud either by lying in state court pleadings or in secretary of state corporate filings. 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:
- obtain forms from the relevant Secretary of State website and pay a nominal fee to reinstate the dormant entity, fraudulently executing the document as an officer or director;
- file a state custodianship or receivership action where the entity is formed using pleadings that falsely state, among other things, that the custodian or receiver has no history of regulatory or disciplinary problems, and will reinstate the operations of the issuer or take actions for the benefit of the 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;
- if the hijacked target is an SEC reporting issuer, file a Form 15 suspending the SEC ‘s reporting requirements by fraudulently executing the filing;
- 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 that substantially dilute the current legitimate 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 and 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 – Red Flags
Private companies considering a reverse merger transaction, and investors as well, should look for these common red flags often found in corporate hijackings of public shell companies:
- 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 that 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;
- 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 the same persons or entities in multiple public shell company or reverse merger transactions.
Regaining Control of the Hijacked Corporation
For the legitimate shareholders and management, it is timely and costly to regain control of a hijacked shell. Hijacked entities 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 the subject of SEC trading suspensions and its securities subject to DTC Chills and/or global locks. To the extent that a private company is willing to expend the time and resources to become public it should do so the proper by way, by filing a registration statement with the SEC and conducting an underwritten or direct public offering. In doing so, the private company owners will avoid the growing risks and new requirements involving reverse merger issuers.
This memorandum 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