Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Wednesday, August 28, 2013

SEC Prevents Bogus Receiverships By Suspending Zombie Tickers

On June 24, 2013, the Securities and Exchange Commission (“SEC”) instituted administrative proceedings to revoke the registration of Green Solutions China, Inc., Yarraman Winery, Inc. (n/k/a Global Beverages, Inc.; (GBVI), and Yinlips Technology, Inc. pursuant to the Securities Exchange Act of 1934.  All of the companies are delinquent with the periodic financial reports required by the Commission.  The SEC has been proactive in preventing corporate hijackings of dormant shell companies for reverse merger transactions with public shells.
When the SEC seeks to revoke registration, usually it first suspends the companies it has targeted.  That was not necessary in this case, because none of the three companies had ever traded.  Only GBVI had been assigned a ticker symbol, but there was no initial interest from buyers, and its sponsoring market maker must have jumped ship quickly.  It currently resides on the Grey Market, the graveyard of over-the-counter securities.
All of the companies did, however, file initial registration statements with the SEC.  More recently, they failed to respond to delinquency notices from the Division of Corporate Finance requesting compliance with their periodic reporting obligations.
The SEC correctly concludes these dormant public shells have been abandoned by their owners, and so are ripe for attacks from corporate hijackers.
Corporate hijackings have been around over a decade but over the past few years, the SEC has been systematically eliminating dormant public shell companies from active public trading, or, if they can, removing them from the market altogether.
Operation Shell Expel l  Reverse Merger
This is part of an SEC program called Operation Shell Expel, which also extends to non-reporting OTCMarkets OTC Pink Sheet stocks to prevent the companies from being used in reverse merger transactions.  The Pinks are suspended and delisted to the Greys; the reporting issuers’ registration is revoked.
Hijackers of public shells typically seize upon companies whose corporate status has been revoked in their states of domicile.  The perpetrators, often sleazy attorneys, file for custodianship or receivership in those states – their motive being to profit from the sale of vehicle in a reverse merger transaction.  If their (bogus) verified petitions are granted—and they almost always are—they’ve succeeded in taking over the public shell.  They then install themselves or their associates as officers and directors, and inform the company’s transfer agent of the change in control.  They may go on to arrange a reverse merger transaction for the shell, followed by a promotional campaign.  In his petition to the state judge, the petitioner invariably makes fraudulent statements including that the action is being pursued for the best interests of the shareholders because the board of directors is deadlocked.  In reality, the legitimate shareholders’ interests are significantly reduced or eliminated and the board was never deadlocked.
The object of Operation Shell Expel is to prevent this from happening.  It is an easy and relatively inexpensive way to take vulnerable shell companies out of the marketplace.
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