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Financial Fraud Law

Trading in 255 Dormant Shell Companies Suspended by SEC

 In a microcap fraud-fighting initiative that the Securities and Exchange Commission refers to as Operation Shell-Expel, the SEC has suspended trading in 255 dormant shell companies that it said were “ripe for abuse in the over-the-counter market.”

According to the SEC, so-called “pump-and-dump” schemes are among the most common types of fraud involving microcap companies.  Financial fraudsters tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

Since Operation Shell-Expel began in 2012, the SEC said that its Enforcement Division’s Office of Market Intelligence has been “cleaning up the microcap marketplace” by scrutinizing penny stocks nationwide and identifying clearly inactive companies.  The SEC said that this has enabled it to proactively suspend trading in several hundred dormant shell companies before fraudsters have an opportunity to manipulate them.

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

The 255 shell companies were in 26 states and two foreign countries.  The SEC said that once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it is still operational – and that it was “extremely rare” for a company to fulfill this requirement.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence.  “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors.  The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

In addition to Ms. Cain, the Operation Shell-Expel initiative has been led by William Hankins, Robert Bernstein, Victoria Adraktas, Jessica P. Regan, Leigh Barrett, John Gibbons, and Megan Alcorn in the Office of Market Intelligence with assistance from the Enforcement Division’s Delinquent Filings Group.

 Contact the author at smeyerow@optonline.net

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