Flash: SEC Brings $6MM Fraud Claim vs. “Footnote 32″ Shell Operators

Flash: SEC Brings $6MM Fraud Claim vs. “Footnote 32″ Shell Operators

In what I believe is the first real case of its kind, the SEC has brought an enforcement case against six individuals, claiming that they created 15 bogus shell companies between 2006 and 2011 and earned $6 million in the process.

In its press release, the SEC said the team set up companies pretending to be in the mining business in order to allow them to complete SEC registrations and have their stock trade, which would not be permitted as a shell company without substantial restrictions unless they were raising at least $5 million under SEC rules.

The SEC said the team put in nominee officers and directors and hid their involvement, and that the companies never had any intention of being in the mining business, but never disclosed that. In addition to disgorgement of the profits, the SEC is seeking permanent injunctions, barring them from being public company officers or directors and not allowing them to be involved with penny stocks.

While on this blog I have long upheld the rights of defendants to the benefit of innocent until proven guilty, this case is potentially game changing as the first time the SEC has gone after operators of so-called "footnote 32″ shells. In a 2005 release the SEC acknowledged and warned against this practice in a famous footnote, but until now had not brought any enforcement actions. Let's hope it begins to send a message to others involved in this improper activity.

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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