Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Saturday, September 21, 2013

SEC Trading Suspensions 101

The Securities Exchange Act of 1934 authorizes the Securities and Exchange Commission (the “SEC”) to issue a trading suspension for up to ten business days.
Investors should exercise caution before investing in a public company after the SEC has issued a trading suspension. Those who do so ignore an obvious indication of securities fraud.  From January 1, 2010 through December 31, 2012, there were over 1,100 SEC trading suspensions.  Of those, more than 600 occurred in 2012. 
An SEC suspension is a blazing red flag suggesting that violations of the securities laws have occurred. Trading suspensions are often followed with SEC enforcment actions or criminal charges.
The SEC will order a trading suspension if it determines it is necessary to protect investors.
Suspensions may be ordered because of:
♦ a lack of current, accurate, or adequate information about an issuer;
♦ concern about the accuracy of publicly available information, in press releases and public filings and reports; or
♦ suspicious trading activity, including trading by insiders, potential market manipulation, and problems with clearing and settlement of transactions in the issuer’s securities.
Suspended stocks fall into two categories. The first is comprised of delinquent filers: stock of fully-reporting issuers who have neglected to keep up with their obligation to file annual and interim financial reports with the SEC. In connection with the suspension, those companies will be subjected to an administrative proceeding in which the SEC seeks to revoke the issuer’s registration. Once that happens, the issuer has a simple choice: it can catch up with its delinquent filings quickly, or have its ticker–and its existence as a public company–eliminated. Most companies in this situation do not object to revocation, despite the brief hopes of investors.
The second category consists of issuers suspected of securities fraud. The SEC may follow the suspension with a further investigation that can result in a civil lawsuit down the road.
A list of issuers whose stock is currently suspended, or which have been subject to an SEC suspension, may be found at the link below:
Post Trading Suspension Trading
When an SEC trading suspension ends, a broker-dealer may not solicit investors to buy or sell the previously-suspended security until certain requirements are met, including the submission of a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) by a market maker. The market maker must represent that the issuer has satisfied all applicable requirements, including those of Rule 15c2-11.   No broker-dealer may solicit or recommend that an investor buy shares in a stock that has been subject to a trading suspension unless and until FINRA has approved a Form 211 relating to the stock. Neither may any broker-dealer publish quotes for the stock.
If there are continuing regulatory concerns about the issuer, its disclosures, or other factors such as a pending regulatory investigation, a Form 211 application may not be approved. In the absence of a no-action letter from the SEC, market makers are unlikely to sponsor a formerly-suspended company. Not a single one of the 1,100 stocks that have been suspended since January 1, 2010 has returned to normal trading on the OTCMarkets platform.
Rule 15c2-11 requires broker-dealers to review and maintain certain documents and information about the issuer, including the corporation’s organization, operations, control affiliates, the nature of the securities outstanding and being traded, the issuer’s most recent balance sheet, and its profit and loss and retained earnings statements.
When a stock is suspended, after four sessions without published quotations it will be demoted to the Grey Market. Once the suspension ends, limited or “unsolicited” trading can occur in these Grey stocks. Investors may trade, but at their own risk. Typically, a brand new Grey loses 60% to 80% of its value the first day out; within a few weeks, volume declines dramatically.
Investors should be extremely cautious in considering an investment in a stock following a trading suspension. At a minimum, investors should ensure that a broker-dealer has submitted a Form 211 that has been approved so that they have current and reliable information about an issuer before investing.
For further information about SEC trading suspensions please visit our blog post at:
For more information about the SEC investigations, see:
Securities lawyer, Brenda Hamilton provides legal advice to market participants about  securities matters including SEC investigations and testimony.

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