Dormant shell companies ripe for fraud

May 14, 2012 | Last updated on May 14, 2012
2 min read

The Securities and Exchange Commission has suspended trading in the securities of 379 dormant companies—the most in a single day.

The commission is ramping up a crackdown against fraud involving dormant and delinquent microcap shell companies, which can be hijacked by fraudsters and used to harm investors through classic cons like reverse mergers or pump-and-dump schemes—which are becoming easier to execute as new technologies emerge.

Read: Online fraudsters headed for prison, along with Know your cyber criminals for more information on online fraud and its consequences.

Microcap companies typically have limited assets and low-priced stocks that trade in low volumes. An initiative tabbed Operation Shell-Expel by the SEC’s Microcap Fraud Working Group, however, has scrutinized microcap stocks in markets nationwide. To date, it’s clearly identified dormant shell companies in 32 states and six foreign countries ripe for potential fraud.

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,” says Robert Khuzami, director of the SEC’s Division of Enforcement.

He adds, “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.”

Thomas Sporkin, director of the SEC’s Office of Market Intelligence, says, “It’s critical to assess risks to investors in the capital markets and, through strategic planning, develop ways to neutralize them. We were able to conduct a detailed review of the microcap issuers quoted in the over-the-counter market and cull out these high-risk shell companies.”

Empty shells can be a financial boon to stock manipulators who typically pay as much as $750,000 to assume control, and then pump and dump the stocks for illegal proceeds. Since this trading suspension requires companies to provide updated financial information, it renders them useless to scam artists.

The SEC’s last big trading suspension was in September 2005 and involved 39 companies. Federal securities laws allow the Commission to suspend trading in any stock for up to 10 business days. Once a company is suspended, it can’t be quoted until it provides updated information, including accurate financial statements.