Good reading here (STRU gets a mention):
By Phyllis Plitch and Michael Rapoport
The Wall Street Journal - 06/22/2000
Copyright (c) 2000, Dow Jones & Company, Inc.
The sheriffs have arrived in one of the Wild Wests of
the stock market.
For years, the small-stock arena known as the
Over-the-Counter Bulletin Board has operated
with relatively lax requirements and scant public
scrutiny. The combination created the
impression it was more a home for unscrupulous
companies and "pump and dump" schemes
than a crucial entree for small companies to the
capital markets.
Now, armed with a smattering of new rules, securities
regulators are seeking to soften the rogue
image of the Bulletin Board, which is a stock-quotation
service run by the National Association
of Securities Dealers for companies too small to list on
the NASD's better-known Nasdaq Stock
Market. This is good news for investors who are brave
enough to invest in these tiny stocks. But
it certainly doesn't mean such investing is no longer
perilous.
The NASD has two new weapons in policing the
Bulletin Board: Through Nasdaq, it will soon be
able to halt trading in Bulletin Board shares in some
circumstances, and it has already been
kicking out many companies completely under a new
"eligibility" rule that requires up-to-date
financial statements with the Securities and Exchange
Commission. Nasdaq's authority to
impose trading halts in Bulletin Board shares goes into
effect Monday.
Still, even with these regulatory changes the Bulletin
Board is no Nasdaq; to list on Nasdaq,
companies must meet minimum tests of financial
stability. On the Bulletin Board, they need only
be current with regulatory filings.
"The Bulletin Board is now a lot safer than it used to
be, but it's still not of the same quality as
you would find listed on other major stock markets,
like the New York Stock Exchange, Nasdaq
or the American Stock Exchange," said James Angel,
an associate professor of finance at
Georgetown University. "It's still a 'buyer beware'
area."
The most recent trouble was disclosed June 14 when
120 people were charged in federal court
in Manhattan in an alleged $50 million securities-fraud
scheme that prosecutors say is tied to
organized crime. And shoe magnate Steven Madden
was arrested Tuesday on charges he
helped two penny-stock brokerage firms commit
fraud. Mr. Madden denies wrongdoing. Though
Mr. Madden's own company, Steven Madden Ltd., is
on Nasdaq, many of the stocks allegedly
manipulated in the two separate cases were Bulletin
Board companies.
A big factor in spurring Bulletin Board fraud is the rise
of the Internet, which makes stock
manipulation easier than ever. Once, corrupt brokers
and touts had to cold-call investors one
by one from a brokerage-firm boiler room; now, with
the same effort they used to reach a single
investor, they can talk up a stock anonymously,
spread phony rumors on a message board to a
huge potential audience, or post fake news or news
releases online.
Says Joseph Borg, Alabama's securities commissioner,
quoting another regulator: "Any scam
artist that doesn't use the Internet ought to be sued
for malpractice."
With the yearlong phase-in period for the newly
imposed eligibility rules nearing its end, nearly
60% of the 5,004 Bulletin Board securities that have
so far come up for review through the end
of May have been kicked off. Most companies have
landed on the Pink Sheets, a traditionally
less-visible market for tiny stocks whose origins go
back to 1904, and which is undergoing its
own evolution.
"We're looking at making the Bulletin Board specifically
a market that's safer for the investor,"
said Adena Friedman, a Nasdaq vice president and
product manager of the Bulletin Board.
Investors certainly seek out the Bulletin Board's tiny
shares. Even with the reduction in the
number of stocks traded on the Bulletin Board,
volume has set records lately -- shooting up in
February and March to more than one billion shares a
day, more than 10 times the level of just
a few years ago. Volume has since ebbed, to less than
a half billion daily, but that is still sharply
higher than past years.
Why is the NASD getting tougher with Bulletin Board
eligibility rules? Just look at Struthers Inc.,
a Charleston, S.C., company in the business of hog
genetics with about 354 million shares
outstanding. Over a three-year period, the company
was known as Latitude Network Inc. and
then Orbis Development Inc., before transforming
into Struthers in the spring of 1998. Its
volatile stock at one point was quoted as high as
$6.37 and as low as 1.5 cents; it recently
traded on the Pink Sheets at 50 cents. At the end of
last year, Struthers, which hasn't turned a
profit since its debut on the Bulletin Board, had
current liabilities of $2.7 million and only
$870,185 in current assets.
The company history and financial information is the
kind of data you might want to know as a
shareholder, but didn't have easy access to until April
13. That is when Struthers finally made a
filing with the SEC as part of the new eligibility rule.
Struthers got the boot from the Bulletin
Board seven days later, for not filing in time to clear
the SEC's review process. (Struthers
President Douglas Beatty, who endorses the rule as a
"good one" to protect investors, pins the
blame for his company's removal on a cumbersome
process of poring over records related to
an acquisition.)
In pushing for the sweeping reform of the Bulletin
Board, the NASD was acting, in part, out of
concern that the public perceived the Bulletin Board
as a highly regulated market, and that
companies lacking in credibility traded off the
legitimacy and prestige of the Nasdaq market,
giving investors a false sense of security.
"Even though nonreporting companies are stripped
away, we're still talking about thinly traded
companies with little industry analysis," said Stephen
Luparello, executive vice president of
market regulation at NASD Regulation. "There's a lot
of activity and a lot of people in it -- you
have to be careful."
For a time, Nasdaq was trying to draw a big line
between itself and the Bulletin Board, said John
Coffee, a professor at Columbia Law School. "I think
now they recognize they can't really
distance themselves and they have to clean it up or it
will tarnish their image," he said.
While many people embrace the increased regulatory
efforts, there have been rumblings that
regulators should be mindful not to choke off the
capital-raising abilities of small companies --
even those with not-so-hot business plans.
"This is a classic balancing situation," said Brandon
Becker, former director of market regulation
at the SEC, now a partner at Wilmer,
Cutler&Pickering. "We don't use federal regulations to
decide who has a good idea or a bad idea. In an effort
to prevent fraudsters, you have to be
careful you don't impede on the ability of legitimate
entrepreneurs to raise money, even if the
ideas ultimately prove unsuccessful."
Meanwhile, questions have also been raised by
small-business advocates and brokerage firms
about whether pushing the companies to the Pink
Sheets is truly advantageous to investors. As
one brokerage insider put it: "The cockroaches are
still in the cabinet."
But the way some people see it, the Pink Sheets are a
more appropriate home for nonreporting
companies anyway, because of a buyer-beware
image that transcends even that of the Bulletin
Board.
One person who subscribes to that theory is
Cromwell Coulson, the current owner of the Pink
Sheets' operator, Pink Sheets LLC (the name has
been officially changed from the National
Quotation Bureau). Mr. Coulson, who took over the
company three years ago, compares the
Pink Sheets with an eBay Inc. online auction, where
there's no outside authority vouching for
the quality of the product.
"Should there not be a place where a chipped vase or
an unsigned painting can sell?" Mr.
Coulson asks. The concern may ultimately be moot,
he added, as the distinction between the
Bulletin Board and the Pink Sheets becomes fuzzier
amid plans to widen the dissemination of
market data on the Pink Sheets, starting with free
15-minute delayed quotations on the Pink
Sheets Web site this month.
The eligibility rule should provide incentives for
companies to provide more information to
investors because of the value associated with a more
liquid segment of the market, said
Stephen Cutler, deputy director of enforcement at
the SEC.
"Obviously there are going to be companies that
don't meet that standard, or can't," he said.
"That doesn't mean at the end of the day investors
are worse off. They weren't receiving
information about those companies in the first place."
---
Surviving on the Bulletin Board
How investors can try to avoid fraud while trading
small stocks on the NASD's
OTC Bulletin Board:
GET THE FACTS, KNOW THE SOURCE
A key, say regulators, is not only to get as much
information about a potential investment as
you can, but to make sure it comes from an
authoritative source, like SEC filings -- not
chat-room rumors or brokers' hype.
NO NAME, NO CREDIBILITY
Beware of Internet postings pumping up a stock. You
don't know the source of the information
or the motives. "If I had special information about a
stock, I don't think I'd go on a message
board and say blah, blah, blah," says Cameron
Funkhouser, NASD vice president of market
regulation.
USE YOUR HYPE METER
Be wary of companies making extravagant claims --
like the company that claimed last year to
have found a cure for AIDS. An executive at the firm
was later arrested on fraud charges in
connection with the AIDS claim. That case is pending
in federal court in Manhattan.
FREEZE OUT THE COLD
If cold-callers try to pressure you to buy a stock,
hang up on them. If you decide to listen,
demand any information or offer in writing. And if a
company or broker won't give you the
information or assurances you need to feel
comfortable, don't buy the stock. -- Dow Jones
Newswires
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