You are right about the SEC.
SEC Proposes New Measures to Combat
Microcap Fraud
By Rusty Szurek - 2/21/98
Over the past several years, the Internet has
evolved into a powerful medium for the
personal investor. Through Internet message
boards, microcap stocks such as TVSI,
BAAT, SEXI, ACCY, BNTI , ADGI, and
many others have gained large followings.
Unfortunately, some individuals have abused
message boards and other Internet resources
to hype and manipulate these types of
stocks. In an attempt to combat these
fraudulent practices, the Securities &
Exchange Commission recently proposed
several regulatory measures. What are the
possible implications of these regulations?
Overview
Microcap companies are predominantly
thinly capitalized stocks that are often not
required to file periodic reports with the
SEC. The securities of these companies are
quoted on three mediums: the
Over-the-Counter Bulletin Board (OTC BB)
under the supervision of the National
Association of Securities Dealers, Inc.
(NASD), in the Pink Sheets under the
supervision of the National Quotation
Bureau, and on the Nasdaq Small Cap
Market. Microcaps, because of infrequent
press releases and hype, often trade on high
volumes with large price spreads and
fluctuations. The SEC has recently become
more concerned about microcap fraud as the
aforementioned trading mediums have
assisted individuals, brokers, and companies
in their efforts to control the markets for
these securities.
The "pump and dump" scheme is one of the
most common types of microcap fraud.
Brokerage firms use their personnel to "cold
call" potential investors to purchase "house
stocks" (stocks in which the brokerage firm
holds a large inventory or makes the
market). Often, the information disclosed to
investors is slightly exaggerated, or it can be
completely fabricated. Message boards on
the Internet have made it very easy for
"pump and dump" schemes to operate.
Promoters or insiders of a company, holding
many shares, commonly post messages
citing the great potential for a company on
these boards. After investors "pump" up the
stock, the insiders and promoters "dump"
their shares, realizing healthy profits.
An example of this scheme involves the
security, Systems of Excellence (SEXI). The
CEO, Charles Huttoe, was convicted of
paying an electronic newsletter to hype his
company's stock. Huttoe pleaded guilty to
making $12 million in illegal profits, and he
is currently serving a 46-month sentence.
The SEC recently made the following
proposals aimed to decrease fraudulent
scams similar to the "pump and dump"
schemes in microcap trading:
NASD Surveillance Proposal
The most recent proposal by the SEC is to
have the NASD implement an automated
surveillance system that will search Internet
message boards, company home pages,
investment sites, and other on-line sources
for fraudulent claims about Nasdaq and
OTC securities. The NASD plans to
investigate companies with large message
followings, suspect postings, and large
fluctuation in daily closes. The surveillance
system has taken a year to develop, and it
will alert the NASD to certain phrases like
"the next Microsoft, hot tip, etc." posted on
the Internet. After being alerted, the NASD
will investigate those companies it feels may
be fraudulent. Mary Schapiro, President of
NASD Regulations, has said that an
"automated technology might have raised
earlier red flags about Comparator Systems
Corp., whose stock rose thirty-fold in a
three-day period in May 1996 before it
collapsed."
However, the NASD does see two problems
with this new system. First, the anonymity of
those posting the messages, and second, the
vastness of the Internet. Despite these fears,
the SEC feels that this system will allow
them a better opportunity to alert the public
and brokerages of possible scams even
though it may not know who exactly is
posting the fraudulent information. The
SEC's enforcement director, William
McLucas, has said "investors need to be just
as wary of the information they read
electronically as they are about a flier they
are handed on the street."
Form S-8 Proposal
Form S-8 is used to register securities for
offer and sale to employees of the issuer in a
compensatory or incentive context. Revised
in 1990, the form has since been used
improperly as a means to sell securities to
the public without the correct investor
protections outlined in Section 5 of the
Securities Act. Fraud occurs in the following
manner: The issuer of Form S-8 registers the
securities to consultants or market-makers
(market-makers: dealers who match buyers
and sellers and help finance trades) who
then act as statutory underwriters to sell the
securities to the general public. As
compensation, the registrant issues the
consultants securities for promoting or
hyping the registrant's securities. This
practice promotes fraud by compensating
market-makers who hype the issuer's stock.
A secondary problem is that often times the
market-makers know little or nothing about
the security they are trading and as a result
provide a disservice to the investor.
The SEC proposals would deter Form S-8
abuse by:
Clarifying that Form S-8 status is not
available for sales to market-makers who
directly or indirectly promote or maintain a
particular company's securities.
Disclosing to the public those advisers who
are receiving stock from Form S-8 clauses.
Microcap Capital Raising Proposal
Although nothing has been formally
proposed yet, SEC officials are seriously
considering regulating ways in which small
companies raise seed capital by selling their
companies securities privately to friends and
family. The current rule, 504 of Regulation
D, allows public and private companies to
sell as much as $1 million worth of stock
without registering the securities with the
SEC. The SEC added this rule to Regulation
D to help small companies raise capital
without having to pay the expensive costs of
federal registration.
The SEC plans to amend this rule by forcing
companies that avoid federal registration of
the security to register the stock sale with a
state's security regulator. This proposal
would also require companies to file
financial statements with state regulators.
The proposal would also recommend that
the owner of the shares be required to hold
the securities for one full year before any of
them can be traded, and two years before all
of the securities can be sold. Under current
SEC law, the securities can be sold
immediately and investors have no access to
a company's financial information.
How will these regulations affect
Investors?
Although the Internet provides a wealth of
information, investors should realize that
much of the information can be false, and
that they themselves, should confirm any
claim made on the Internet. If passed, these
new regulations will help the personal
investor. It should help remove some of the
fraudulent microcaps and hopefully lessen
the hype found on message boards.
However, because the Internet is so vast it is
impossible to curb all fraudulent schemes.
The new regulations should not be
cumbersome for legitimate small companies.
Stanley Keller, co-chairman of the American
Bar Association's task force of small issuers
said, "This won't be particularly burdensome
to small companies and shouldn't interfere
with legitimate small-business financing
efforts." Investors should realize that the
SEC does not require companies that are
raising less than $1 million to formally
register with the SEC. Therefore, these
companies do not have to file reports with
the SEC. Investors should be extra careful
with companies that fit this description.
Investors should research as much as
possible about a company before they invest.
Never rely solely on information from
on-line sources to make an investment
decision.
Investors interested in visiting the SEC's
guidelines to "INVESTigating before you
INVEST" should visit:
sec.gov.
SEC Investor Beware
Office of Investor Education and Assistance
June 1996
Investment Fraud and Abuse
Travel to ...
The explosion of commercial on-line services and the rising popularity of
the Internet have created new opportunities and new dangers for
investors. This flyer alerts you to the types of investment fraud and abuse
used on-line and suggests ways to avoid becoming the next victim.
The On-Line World:
What Is It?
The on-line world consists of thousands of electronic networks linking
computers, people and information all across the world. Commercial
on-line services boast millions of subscribers who use personal
computers for public discussion, to exchange electronic mail, and to read
publications. Millions of other computer enthusiasts use the Internet, a
"network of networks," that weaves together thousands of computers
into a global web of information. Although this can be a valuable source
of investment information, the world of on-line computing can also be
complicated, confusing and even dangerous.
One of the most attractive features of on-line computing is
communicating to a large audience without spending a lot of time, effort,
or money. By posting a message on a bulletin board, using a chat room,
or constructing a site on the Internet, you can broadcast messages to
tens of thousands of users. Unfortunately, this powerful tool can cause
real problems when used to defraud investors.
The On-Line Investment Scam:
New Medium, Same Message
While investment con-artists have been quick to seize upon on-line
computing as a new way to cheat investors, the types of investment
fraud seen on-line mirror frauds perpetrated over the phone or through
the mail. Consider all offers with skepticism.
Investment frauds usually fit one of the following categories:
The Pyramid
"How To Make Big Money From Your Home Computer!!!" One on-line
promoter claimed recently that you could "turn $5 into $60,000 in just
three to six weeks." In reality, this program was just an electronic
version of the classic "pyramid" scheme in which participants attempt to
make money solely by recruiting new participants into the program. This
type of fraud is well-suited for the world of on-line computing where a
troublemaker can easily send messages to a thousand people with the
touch of a button. Unfortunately, these "investment opportunities"
collapse when no new "investors" can be found.
The Risk-Free Fraud
"Exciting, Low-Risk Investment Opportunities" to participate in
exotic-sounding investments, including wireless cable projects, prime
bank securities and eel farms, have been offered on-line. One promoter
attempted to get people to invest in a fictitious coconut plantation in
Costa Rica, claiming the investment was "similar to a C.D., with a better
interest rate." Promoters misrepresent the risk by comparing their offer
to something safe, like bank certificates of deposit. Sometimes, an
investment product does not even exist - they're scams.
The "Pump And Dump" Scam
It is common to see messages posted on-line urging readers to buy a
stock quickly that is poised for rapid growth, or telling you to sell before
it goes down. Often the writer claims to have "inside" information about
an impending development, or will claim to use an "infallible"
combination of economic and stock market data to pick stocks. In
reality, the promoter may be an insider who stands to gain by selling
shares after the stock price is pumped up by gullible investors, or a short
seller who stands to gain if the price goes down. This ploy may be used
with little-known, thinly-traded stocks.
The SEC is Tracking Fraud
In investigating on-line fraud, the SEC can get a court order to stop
scams. The SEC took action in the following cases:
Pleasure Time, Inc: Astronomical profits were promised in a worldwide
telephone lottery. Over two million dollars of unregistered securities
were sold to 20,000 investors who were encouraged to recruit other
investors on the Internet. The SEC filed a lawsuit and the company's
assets were frozen.
IVT Systems: The company solicited investments to finance the
construction of an ethanol plant in the Dominican Republic. The Internet
solicitations promised a return of 50% or more with no reasonable basis
for the prediction. Their literature contained lies about contracts with
well known companies and omitted other important information for
investors. After the SEC filed a complaint, they agreed to stop breaking
the law.
Scott Frye posted a notice that he was looking for investors for two
Costa Rican companies that produced coconut chips. He claimed A&P
supermarkets placed an order to buy all the chips he could produce. He
was forced to withdraw his notice when his lies were discovered.
Gene Block and Renate Haag were caught offering "prime bank"
securities, a type of security that doesn't even exist. They collected over
$3.5 million by promising to double investors' money in four months.
The SEC has frozen their assets and stopped them from continuing their
fraud.
Daniel Odulo was stopped from soliciting investors for a proposed eel
farm. Odulo promised investors a "whopping 20% return," claiming that
the investment was "low risk." When he was caught by the SEC, he
consented to the court order stopping him from breaking the securities
laws.
Here's How You Can Protect Yourself
Follow our checklist and you should steer clear of on-line fraud, but first
a word about the information these companies are required to file at the
SEC and some basic tips.
The SEC does not require companies that are raising less than one
million dollars to be "registered" at the SEC, but these companies are
required to file a "Form D" with the SEC. The Form D is a brief notice
which includes the names and addresses of owners and promoters, but
little other information. Call the SEC at (202) 942-8090 to get a copy of
the Form D. If there isn't a Form D, call the SEC's Office of Investor
Education and Assistance at (202) 942-7040. But don't stop there. You
should always check with your state securities regulator to see if they
have more information about the company and the people behind it, and
if your state regulator has cleared the offering for sale in your state.
Because these small companies are usually the most risky investments
that you can make, you should always get as much written information
as you can from the company. Check out this information with an
unbiased and informed source -- your broker, accountant or lawyer.
Your state's securities regulator should be your first stop, but you may
also want to visit your local library and talk with the librarian about other
sources of information. There are a number of services that provide a
constant stream of information about the financial condition of
companies.
Make sure you know as much as possible about the company, before
you invest. Don't ever rely solely on what you read on-line to make an
investment decision.
Seen a Potential
On-Line Fraud?
Tell Us About It!
We want to hear about securities fraud appearing on-line, by telephone
or in the mail. The specialists in the SEC's Office of Investor Education
and Assistance can also answer your questions or help you to try to
resolve your complaints.
You can reach the SEC by calling (202) 942-7040 or by visiting our web
site at www.sec.gov. You can also us by electronic mail. Contact the
Office of Investor Education and Assistance at help@sec.gov or the
Division of Enforcement at enforcement@sec.gov.
Or write to:
Securities and Exchange Commission
Office of Investor Education & Assistance
450 Fifth Street, N.W. Mail Stop 11-2
Washington, D.C. 20549
If you have seen a potential on-line investment fraud, you may want to
check the Enforcement Complaint Center.
To reach your state securities regulator, check our state government
section, in your phone book, or call the North American Securities
Administrators Association (NASAA) at (202) 737-0900
sec.gov
Last update: 12/08/97
I hope this company and EVERYONE that's talking about over 100 million oz of gold is right, otherwise???????
Mr Metals |
