Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Wednesday, August 28, 2013

Taking Remedial Measures After Acquiring A Custodianship Shell

Between January of 2000 and present, the Securities and Exchange Commission (the “SEC”) has suspended or halted more than 1400 publicly traded companies. Most were dormant penny stock issuers suspended to prevent corporate hijackings by custodianship or receivership proceedings. Others were penny stock issuers engaged in massive pump and dump schemes.
Some of the suspended companies had been dormant for almost a decade. How did these dormant companies manage to continue trading, albeit infrequently, for so long?What some call “zombie tickers” are familiar features of the penny landscape. Zombie shells that the SEC fails to suspend are always vulnerable to fraudsters looking to take them over in bogus custodianships and other forms of corporate hijackings. The victims are always the legitimate shareholders of these dormant companies as well as future investors in the post-reverse merger company.
Dormant public shells have been victims of corporate hijackings for more than a decade. This raises an important question. How many were illegally taken over and used in reverse merger transactions before the SEC started suspending these companies? How many people were involved in these hijackings and how many companies were taken over in this manner?
Corporate hijackings have plagued the microcap markets for years, and while the SEC and Justice Department have pursued numerous actions against the parties responsible for the hijackings, they have overlooked the most egregious wrongdoer of all: the hijacker who uses bogus custodianship and/or receivership actions to obtain control of dormant public shells. Typically these actions involve the fraudulent filing of state court pleadings (submitted under the penalties of perjury) in order to gain control of a dormant issuer.
In the SEC’s news announcement concerning the recent trading suspensions, Robert Khuzami, director of the SEC’s Division of Enforcement stated, “Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers–the tools by which they ply their illegal trade. This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors.”
In the last two years, the SEC has been fairly diligent in removing dormant shells from the marketplace before they can be hijacked and used in reverse merger transactions. But why not deal with all of them? OTCMarkets’ No Information tier would be an excellent place to start. Currently there are 3,067 completely dark companies assigned to this tier, nearly all of them vulnerable to fraudsters seeking shells for reverse mergers.
Anyone considering a reverser merger into a public shell company whose control was obtained through a custodianship or receivership action should understand that he could become embroiled in future civil and criminal actions involving the hijackers as well as the issuer, if he completes a transaction with a hijacked shell.
Any issuer that previously engaged in a reverse merger with a custodianship and/or receivership shell should make appropriate public disclosures of the state court proceeding, including the details of all securities transactions and payments made in connection with the reverse merger. Further the basis for custodianship and receivership actions should  be investigated.
Custodianship and receivership actions are based upon state statutes that allow custodians or receivers to be appointed when a company’s shareholders and/or board of directors are deadlocked.  Fraudsters locate dormant issuers and file pleadings that misrepresent that shareholder and/or board meetings were held. They seek to have their co-conspirators appointed to manage the affairs of the corporation because of the nonexistent deadlock.  Once appointed they issue shares to themselves and take over the corporation. To avoid detection they provide no notice to the dormant issuer’s shareholders or board of directors. Once in control they change the domicile and the company name to conceal their actions.
Anyone purchasing such companies,  should file all relevant pleadings, including affidavits, as exhibits to their SEC and OTCMarkets filings to satisfy the antifraud provisions of federal and state securities laws. Issuers should also confirm all corporate matters described in the custodianship and/or receivership action, including contacting the former board of directors and shareholders and obtaining minutes of meetings.  More than once a scammer has sworn to a judge that “the board was deadlocked”—a situation creating a reason for the custodianship application—when in fact there was only one board member.
For additional information relating to the trading suspensions, see:
SEC Trading Suspensions: litigation/suspensions.html
For more information please visit: Securities Lawyer 101

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