Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Tuesday, June 25, 2013

SEC Revokes Five Issuers to Prevent Reverse Merger Scams

On May 24, 2013, the Securities and Exchange Commission (“SEC”) revoked the registrations of Enercorp, Inc. (ENCP), FTS Group, Inc. (FLIP), Games, Inc. (n/k/a InQBate Corporation; INQB), Hartmarx Corporation (n/k/a XMH Corp. 1; (HTMXQ), and Penn Treaty American (PTYA) by default.
The SEC had suspended trading in the five companies on April 25, 2013 and initiated an administrative proceeding on the same day.  All were SEC reporting companies that had failed to file required financial reports for years, although they continued to trade as OTCMarket Pink issuers.
All five became dormant companies.  As such, they were vulnerable to attack from corporate hijackers, who track down state incorporation data for dead public shells and, if they find corporate status has been revoked, institute custodianship or receivership proceedings in a state court.  The perpetrators, often sleazy securities lawyers, then install themselves or their cronies as officers and directors.
The next step is to inform the transfer agent of a change of control, and begin updating filings at OTCMarkets or Edgar.
What follows is a reverse merger transactions involving the dormant public shell. Once this is complete is often a major promotion, in which stock price briefly soars until selling by insiders causes it to crash and burn.
Along the way, the scammers deceive the state judge by lying about the public shell.  Sometimes they claim an award of custodianship is appropriate because the company’s board of directors is “deadlocked.”  In many cases, there is no board of directors, or there is only one director, which would make a deadlock impossible.  In most if not all cases, their pleadings are fraudulent.
The SEC is concerned about corporate hijackings of dormant shells and the use of the dormant public shell in reverse merger transactions.  In the past two years, it has suspended trading in hundreds of companies that might become targets for unscrupulous stock manipulators planning fraudulent reverse mergers.  The agency calls this program Operation Shell Expel.  Once the suspensions end, the delinquent reporting companies will be subjected to administrative proceedings to revoke registration, which results in the deletion of their ticker symbols.  They will not trade again.  Non-reporting Pinks will resume trading on the Grey Market, an extremely illiquid venue from which they are unlikely to escape.
There’s no point in hijacking a company whose registration has been revoked.  The same is true for a former Pink that has been removed to the Greys.  Operation Shell Expel is an inexpensive and easy way to prevent fraud from happening particularly with the increase of fraudulent custodianship and receivership proceedings in recent years.
People considering an investment in a microcap stock should make an effort to determine that the company has active corporate status in its home state, and that it has not been recently reinstated and undergone a change in control through a custodianship or receivership proceeding.

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