Custodianship Proceedings 101 l Corporate Hijacking Series
Familiar to everyone in connection with real property, squatting consists of occupying an abandoned or empty property that the squatter does not have lawful permission to use.
A new form of squatter is distinguishing himself among the bottom feeders who prey upon small, financially distressed public companies. These squatters, who are often securities professionals including transfer agents, accountants and lawyers, engage in corporate takeovers using illegal custodianship and/or receivership actions that have become commonly known as Squattership Proceedings.
Squattership proceedings involve participants who file fraudulent pleadings in custodianship and receivership actions in order to trick a state court judge into providing them with an order appointing a custodian or receiver. Penny stock squatters take several carefully planned steps to carry out their scheme. Squattership Proceedings have become a microcap epidemic. While methods used by the fraudsters vary, the end goal is the same: to obtain control of a public shell company (“public shell”) and sell it in a reverse merger transaction. Public shell illegally taken over in Squattership Proceedings have featured in reverse merger transactions for some of the most notorious pump and dump schemes in the history of the microcap markets. Squattershhip Proceedings have literally created hundreds of public shells used in microcap frauds involving reverse merger transactions. The participants are the shell suppliers to the unregistered brokers, sleazy investor relations firms and promoters who acquire public shells to use in fraudulent schemes that have caused hundreds of millions of dollars in investor losses.
Who Are the Squatters?
Squattership Proceedings typically have four participants, at least two of whom are attorneys:
♦ A participant (the “bogus shareholder”) who buys or purports to buy shares of the target public shell so that he can serve as a plaintiff in the Squattership Proceeding;
♦ A participant who is a corrupt or incompetent securities lawyer (the “SEC lawyer”) who provides legal opinions, prepares corporate amendments for reverse splits and name changes, and submits other information to the relevant Secretary of State, transfer agents, FINRA and the SEC;
♦ A participant who serves as a receiver (the “receiver”); and
♦ A lawyer who files the necessary state court action and receives a default judgment.
How the Squatters Pull it Off
When a corporate entity is incorporated, it is required to file a one page annual report with the Secretary of State each year that lists its officers, directors, contact information and registered agent. If the corporate entity fails to file the required report, the relevant Secretary of State “administratively” dissolves the entity. Unlike other types of corporate dissolution, an administratively dissolved entity can be reinstated at any time by paying a nominal fee and sending in a new one page annual report listing the corporation’s officers and directors. Squattership Proceedings use administrative dissolution as the basis for their bogus state court action by stating the corporation has been abandoned. Any publicly traded corporation that fails to file its annual report is vulnerable to the scheme.
What The Hijackers Do To Get Control of the Public Shell l the Florida Example
The scheme varies somewhat from state to start but always involves a bogus shareholder action based upon fraudulent state court actions. In Florida for example, the participants rely upon Florida Statutes §607.1430, which allows a shareholder of a Florida corporation to petition the court to appoint a receiver under limited circumstances to manage the corporation’s affairs in the “best interests of the corporation and its shareholders.” A Section 607.1430 action for dissolution is not available if, as in Squattership Proceedings, the corporation is already dissolved or a participant in the scheme became a shareholder to pursue a bogus action to take control of a public shell.
To pull off their plan, the participants must make false statements to a state court judge about the supposed “deadlock” of the board of directors that the shareholders of the corporation cannot break. Most importantly, the participants must swear under the penalties of perjury to these false statements. Needless to say, the participants have no information at all about the affairs of the company or its board of directors, or of actions taken or not taken by majority shareholders including whether there was a deadlock. Additionally, in order to obtain the order from the state court judge, the participants omit various material facts including that they have no intention of seeking a final order for judicial dissolution and that the appointment of the receiver is only to allow them to obtain control of a public entity. The participants simply fabricate the allegations in the verified pleadings. Upon filing the action, the participants typically fail to effect proper service of process on the legitimate management of the corporation enabling them to receive default judgments. Once the action is filed, the participants petition for a hand picked receiver who is a participant to be appointed. Upon appointment, the receiver then causes the issuance of sufficient shares of stock to provide the participants with control of the public entity. After obtaining control but prior to the judge executing the final order for dissolution of the corporate entity, the participants dismiss the action.
How They Get Away With It
Because they participants receive a default judgment, there is no review of their actions or the application of Florida Statutes §607.1430. Legitimate shareholders and management of the targeted public shell are not given notice of the Squattership Proceedings. In order to avoid detection and prevent the legitimate shareholders from filing responses to the bogus legal action, the participants file actions in obscure local courts where they’re unlikely to be seen by anyone but the courthouse staff. Because no proper notice of the action is given to the legitimate shareholders and management, the participants receive default judgments, their fraudulent pleadings rubber-stamped by state court jurists.
It should be noted that often the public shells hijacked in Squattership Proceedings are small companies with only one director. Obviously the board could not possibly be deadlocked with one director.
Once the participants receive the order appointing the receiver, they present it to:
♦ the Florida Secretary of State, so that they can list themselves or their designees as officers and directors;
♦ the SEC and FINRA, pursuant to Rule 6490, when they sell the public shell or amend its articles of incorporation; and
♦ the public shell’s transfer agent, to cause it to issue the illegally obtained shares representing control.
The bottom line is that the participants get away with the scheme because nobody ever looks at how they obtained the order.
How the Hijackers Harm the Legitimate Shareholders
Once the receiver is appointed, he sees to it that the corporation issues sufficient shares of stock to the bogus shareholder to ensure the participants’ control of the shell. Typically, the participants change the corporate name and domicile making it difficult for the legitimate shareholders to locate the hijacked entity. Once that’s accomplished, the legitimate shareholders’ interests are impaired by reverse stock splits or other restructurings designed to eliminate or reduce their ownership. The purpose of these corporate actions is to create a more appealing reverse merger candidate for the scheme. By the time the shell is sold, legitimate shareholders may have no idea who controls the company. The participants, on the other hand, will have lined their own pockets with the big fat profits from the scheme.
For more than 8 years our founder, Brenda Hamilton, has assisted the shareholders and management to regain control of their publicly traded companies, rescind unauthorized transactions and report illegal corporate hijackings, securities issuance's and/or transfers to the Federal Bureau of Investigation, Securities and Exchange Commission and Financial Industry Regulatory Authority.