Business
Saturday, November 9, 1996
SECURITIES TRADING
SEC gets tougher with suspensions
By Miles Weiss
BLOOMBERG BUSINESS NEWS
WASHINGTON -- In the rough-and-tumble game of securities trading, the referees are calling more official time-outs.
The Securities and Exchange Commission, which polices the nation's stock markets, has doubled its use of trading suspensions over the last 12 months -- although the total number, at 10, is still small,
The suspensions, which lasted 10 business days each, bar the trading of a particular company's securities on the open market. Stocks recently grounded by the SEC include Comparator Systems Corp., Home Link Corp., and Systems of Excellence Inc., a McLean, Va., manufacturer of video-conferencing systems.
Trading has resumed in Systems of Excellence shares, but on Thursday, the agency filed a $10 million civil lawsuit, charging the company and its former chairman with securities fraud to boost its stock price last summer. The company had no comment, and lawyers for the former chairman said they were studying the suit.
The SEC issues the trading-suspension orders when, for example, it believes a company's financial disclosure is materially inaccurate or incomplete. That protects the general public from buying a stock whose price may be artificially high.
However, existing investors get stuck holding their shares during the suspension, often to see the price plummet as soon as trading resumes. Systems of Excellence shares lost more than half their value after an SEC trading suspension ended on Oct. 21.
``I was a small guy waiting for my boat to come in, and I got sunk,'' said James McGuirt, a Miami father of three who, before the suspension, bought 6,000 Systems of Excellence shares. He had hoped to make a profit on the stock and use that to help finance his home-improvement business.
Until recently, the SEC ordered at most three or four suspensions annually. Securities attorneys explained that the agency was loathe to interfere with investors by intervening in the stock markets.
But when public disclosure by a company is particularly misleading, the agency now believes the benefits of warning the public outweigh the short-term drawbacks of suspending trading, said Gary Sundick, an associate director in the SEC's enforcement division. He says the agency issued two suspensions in October alone.
Securities lawyers say the agency's strategy now is to step in before investors lose money rather than waiting until the damage is done.
``The prophylactic is a heck of a lot easier than the cure,'' said Stuart Gordon, a former chief counsel of special enforcement at the SEC, who is now a lawyer in private practice.
The jump in the number of suspensions may reflect an increase in fraud. With the Dow Jones industrial average above 6,200 for the first time, scam artists are seeking to profit from the many investors who are pouring money into stocks, said Bill McLucas, director of enforcement at the SEC.
Several of the SEC's latest suspensions have occurred at small companies with gyrating stock prices and trading volumes -- in other words, those most subject to market manipulation.
The best known example is Comparator, an Irvine, Calif., supplier of fingerprint identification systems. The SEC suspended Comparator's stock after 451 million company shares changed hands during a three-day period in May, a record for the Nasdaq.
Comparator shares, which traded as high as $1.87 on May 7, are now at 3 cents each.
A lower share price may be an accurate reflection of a company's actual worth. However, fear and confusion also are factors. The SEC doesn't release any facts underlying a trading suspension when the order is issued. This lack of information leaves many investors anxious, possibly contributing to the sell-off when a suspension ends.
For instance, in suspending Systems of Excellence shares, the SEC said questions had been raised in several areas, including the value of services provided by consultants who were paid with company stock. Systems of Excellence over the past year had quietly agreed to issue some 36 million shares to consultants, greatly diluting the interests of other stockholders, information investors essentially had to find out for themselves.
``I didn't see that, as a result of the suspension, any questions were answered,'' said Abraham Greenstein, a Systems of Excellence investor who was left wondering by the SEC move.
The company's stock price plunged again yesterday because of the SEC's lawsuit. It closed yesterday at 15 cents a share, down 29 cents.
Philadelphia Online -- The Philadelphia Inquirer, Business -- Copyright Saturday, November 9, 1996
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