Turning up the heat on
scamsters
pathfinder.com
The bull market has brought with
it a rash of small cap frauds. Now
the SEC wants to strike back
by Michael Brush
Thursday, February 26, 1998
7:30 p.m. EST
Charges by the
U.S. District
Attorney's office
in Manhattan on
Wednesday that
New York Stock Exchange
(NYSE) floor brokers used their
knowledge of pending orders to
get an edge in the market have
given the squeaky-clean Big
Board a black eye.
But while the spotlight is on the
NYSE, don't forget that retail
investors are much more likely to
get ripped off in the small cap
arena.
That's partly because microcap
stocks tend to be thinly traded on
the National Association of
Securities Dealers (NASD) Over
the Counter Bulletin Board or in
the "pink sheets," so called for
the color of the pages used to list
them by the National Quotation
Bureau.
Thinly traded stocks are more
easily manipulated by
unscrupulous brokers who talk
them up only to dump their own
position on hapless investors.
Another problem is the lack of
information on microcap stocks.
The Securities Exchange
Commission (SEC) says that
these factors, plus the booming
markets, have contributed to a
sharp upturn in microcap fraud
that involves millions of dollars.
Now it wants to close down
some of the loopholes commonly
used by small-cap fraudsters.
Here's what they have in mind,
scary bureaucratic language and
all.
The S-8 Scamsters: The SEC
originally created "S-8" forms to
give companies a quick way to
register shares used to
compensate employees. No
messy prospectus needed
because the SEC figures that
employees already know about
their company. Then in 1990,
the SEC decided to let
companies use the form to
register shares meant for paying
consultants, as well. Voila! A
loophole was born.
Scamsters quickly figured out
that companies could use this
route to register shares for
"consultants" whose only real
"service" was to turn around and
sell those shares to the public. In
other words, they found a way to
get new shares in the market
without having to file a new
prospectus. The SEC has
proposed a change that would
shut down the use of this form
for shares that go to
"consultants" who are really
brokers in disguise. To keep
track of things, it also wants a list
of the names of any
"consultants" who get shares
through the use of this EZ
registration form.
Regulation S Shenanigans:
"Reg. S" lets companies avoid
registering shares with the SEC,
as long as those shares are to be
sold offshore. After all, reasons
the SEC, if the stock is going to
another country, let them worry
about it. Problem is, some
brokers have been abusing this
rule by bringing these shares
back into the U.S. markets. The
SEC wants to make "Reg. S"
securities like any other
restricted securities, meaning
that they can't be resold in the
U.S. without being registered.
The Rule 15c2-11 Fake Out:
Here's another clever trick used
by microcap rip-off artists. When
hyping a small cap stock, they
like to have quotes from several
market makers, implying that the
stock is well followed. Problem
is, a lot of market makers who
publish quotes don't know the
first darn thing about the stock.
How can this be? As things stand
now under this rule, market
makers in bulletin board or pink
sheet stocks have to look over
the basics of the company at
least once a year, already a
pretty low standard. But once
their quote has been out for 30
days, other market makers can
"piggyback" -- by publishing the
same number, even if they can't
prove that they know anything
about the company. The SEC
wants to make the "piggyback"
market makers check up on the
company once a year, too,
before they offer quotes. What's
more, it wants to up the standard
when it comes to how much they
have to know about the
company.
Does all this sound too
complicated? For more basic
stuff on how to avoid getting
ripped off in the stock markets,
check out the SEC's "Facts on
Saving and Investing Campaign,"
a series of town hall meetings
and seminars to take place
between March 29 and April 4.
The SEC also has several free
publications about investing
fraud. For more information, visit
the SEC's Web site, or call
800-SEC-0330. |
