Re: 2000 - Indiana Law Journal: "Click Here to Buy the Next Microsoft": The Penny Stock Rules, Online Microcap Fraud, and the Unwary Investor (Part 3 of 3)
Footnotes
* J.D. Candidate, 2000, Indiana University School of Law-Bloomington; M.A., 1994, University of Kansas; B.A., 1991, Hanover College. I would like to take this opportunity to give my sincere thanks to Professor Hannah L. Buxbaum for all of her invaluable help with the publication of this Note.
1. Katrina Brooker, The Scary Rise of Internet Stock Scams, FORTUNE, Oct. 26, 1998, at 187, 192.
2. See id. at 192.
3. For a sobering discussion of the various penny stock scams of the past two decades, how they are conducted, and how much money investors have lost, see GUY W. BEAVEN, HELLO SUCKERS!: INSIDE THE BRUTAL WORLD OF STOCK MARKET SCAMS AND HOW TO PREVENT FALLING VICTIM 40-55 (1995).
4. See Brooker, supra note 1, at 187.
5. See id.
6. Securities and Exchange Act of 1934, 15 U.S.C. § 78 (1994); see JAMES D. COX ET AL., SECURITIES REGULATION 654-55 (2d ed. 1997).
7. See COX ET AL., supra note 6, at 654.
8. 15 U.S.C. § 78(l); see COX ET AL., supra note 6, at 654.
9. 15 U.S.C. §78(g); see COX ET AL., supra note 6, at 681.
10. 15 U.S.C. § 78(j)(b); see COX ET AL., supra note 6, at 654-55.
11. See Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990) (codified in scattered sections of 15 U.S.C.). "Penny" or "microcap" stocks are defined in the Exchange Act as "low-priced shares of small companies not traded on an exchange or quoted on NASDAQ." General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.15g-100 (1998).
12. See generally 104 Stat. at 931; 17 C.F.R. § 240.15g-100. The reason that most fraud involves penny stock is that penny stocks-also known as microcap or small-cap stocks-are often not listed on any national stock exchange but are sold on the over-the-counter market, which is generally conducted broker to broker, or listed in the "pink sheets" or NASD OTC Bulletin Board. See id. Such stocks are sometimes not quoted and information about the issuer is often more difficult to obtain than it is for stocks listed on a national exchange. See id.
13. 104 Stat. at 931.
14. Penny Stock Disclosure Rules, Exchange Act Release No. 30,608, 57 Fed. Reg. 18,004 (1992); see also 17 C.F.R. §§ 240.15g-1 to -100.
15. See 17 C.F.R. § 240.15g-100.
16. 17 C.F.R. § 240.3a51-1; see also O. Douglas Hernandez, Jr., Broker-Dealer Regulation Under the New Penny Stock Disclosure Rules: An Appraisal, 1993 COLUM. BUS. L. REV. 27, 32.
17. Brooker, supra note 1, at 187.
18. See id. The Electro-Optical Systems scam discussed by Brooker is typical of many of the microcap stock frauds and illustrates the difficulty investors may encounter in trying to find out information about such companies. See id. at 192-93.
19. See id. at 188. The number of investors who use the Internet to research or invest in securities is estimated to be "nearly one-third" of the thirty million households online. Id. at 187-88. A recent survey indicates that three million of these households have online trading accounts and the number is expected to grow to fourteen million by the year 2001. See id. at 188.
20. 15 U.S.C. § 77 (1994).
21. See Arthur Levitt, The SEC Perspective on Investing Social Security in the Stock Market, Speech at the John F. Kennedy School of Government Forum (Oct. 19, 1998), available in 1998 WL 781104.
22. David Barboza, 44 Stock Promoters Accused by S.E.C. of Internet Fraud, N.Y. TIMES, Oct. 29, 1998, at A1. A Ponzi scheme is a phony investment plan in which monies paid by later investors are used to pay artificially high returns to the initial investors, with the goal of attracting more investors. See WEBSTER'S NEW WORLD DICTIONARY 1049 (3d ed. 1988). A pyramid scheme is a "property-distribution scheme" in which an investor pays for a chance to receive compensation based on introducing new persons to the scheme, as well as when the new persons themselves bring others into the scheme. BLACK'S LAW DICTIONARY 516 (Pocket ed. 1996).
23. Barboza, supra note 22, at A1.
24. See id. The fact that there is no typical profile of a victim of Internet securities fraud may have to do with the difficulty even relatively "sophisticated" investors have in verifying the legitimacy of an Internet offering or investment advice. See id.; see also Brooker, supra note 1, at 187.
25. For a good description of various kinds of securities victims, see Brooker, supra note 1, at 187. The victims include a California attorney, a bankruptcy clerk, and an unemployed engineer. Id.
26. See 15 U.S.C. §§ 77k-77l (1994); 17 C.F.R. § 240.10b-5 (1998).
27. Penny Stock Disclosure Rules, Exchange Act Release No. 30,608, 57 Fed. Reg. 18,004 (1992).
28. See Alexander C. Gavis, The Offering and Distribution of Securities in Cyberspace: A Review of Regulatory and Industry Initiatives, 52 BUS. LAW 317, 321 (1996).
29. 17 C.F.R. § 240.15g-100 (1998).
30. Penny Stock Disclosure Rules, 57 Fed. Reg. at 18,004.
31. See Hernandez, supra note 16, at 29; see also 17 C.F.R. § 240.3a51-1 (1998).
32. See Hernandez, supra note 16, at 33, 34 (discussing a narrowing of the penny stock definition).
33. 17 C.F.R. § 240.15g-100.
34. See, e.g., Kevin Mason, Comment, Securities Fraud over the Internet: The Flies in the Ointment and a Hope of Fly Paper, 30 CASE W. RES. J. INT'L L. 489, 495 (1998).
35. See Fraud on the Internet: Scams Affecting Consumers: Hearing Before the Permanent Subcomm. on Investigations of the Comm. on Governmental Affairs, 105th Cong. 3 (1998) [hereinafter Scams Affecting Consumers] (opening statement of Senator Glenn).
36. For instance, promoters of Internet stock scams can "spam" tens of thousands of people-that is, send them unsolicited e-mails-with almost no cost to themselves in time or money. See, e.g., Michael Schroeder & Rebecca Buckman, U.S. Attacks Stock Fraud on Internet, WALL ST. J., Oct. 29, 1998, at C1.
37. See Brooker, supra note 1, at 187, for the story of Michael Bowin, a petty con artist and alleged pimp, who set up a flashy Internet site at no cost to himself and made $190,000 in profit in three months from a variety of would-be investors before the SEC caught him.
38. See Christine Dugas, Stock Fraud Reached out on the Internet in 1998, USA TODAY, Dec. 21, 1998, at 5B.
39. See Humberto Cruz, We Have Met the Enemy and It Is Us, CHI. TRIB., Dec. 11, 1998, § 6, at 3. "Day traders" are usually unsophisticated investors who hope to make a quick profit by darting in and out of stocks that are traded online. See id. However, such investors are rarely successful and are blamed for causing stock prices to fluctuate without any connection to the profitability of the company offering the stock. See id.
40. See id. One may also question whether the Efficient Market Hypothesis-the theory that the capital markets reflect all the information available about any given security-truly applies to the capital markets given the presence of investors who engage in "day trading" despite the evidence that such trading is unprofitable for investors. See COX ET AL., supra note 6, at 3 -42. Indeed, the presence of "day traders," as well as the continuing amount of securities fraud despite all the warnings given by the SEC and other regulatory bodies, tends to support the "noise" hypothesis of stock market investing, which states that the securities markets are subject to "pricing influences not associated with rational expectations about asset values." Id. at 40. Or to state a variant of the "noise" hypothesis even more bluntly, one may quote financier Bernard Baruch, who declared, "‘[a]nyone taken as an individual, is tolerably sensible and reasonable-as a member of a crowd, he at once becomes a blockhead.'" Id. at 41 (quoting B.M. Baruch, Foreword to CHARLES MACKAY, EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS at xiii (2d ed. 1932)).
41. See Brooker, supra note 1, at 187.
42. See id.
43. See id.
44. See Robert MacMillan, FTC Catches Bad Investment Wave, NEWSBYTES NEWS NETWORK, Dec. 21, 1998, available in 1998 WL 20720604. Recently, NASAA, NASD, the FTC, and the CFTC joined together for "Surf Day," which entailed investigating and analyzing some 400 websites and usenet group messages that purported to give investment advice. See id.
45. See Brooker, supra note 1, at 187.
46. See Schroeder & Buckman, supra note 36, at C1.
47. See Brooker, supra note 1, at 198. The SEC's "cyberforce" conducted a sweep of 44 "stock promoters, Web-site operators and newsletter publishers" who were suspected of promoting penny stocks in violation of the antifraud provisions of the '33 Act and of the Exchange Act. Schroeder & Buckman, supra note 36. The promoters typically gave out "enthusiastic ‘buy' recommendations" either in e-mails or newsletters directed at investors without disclosing that the promoters had a financial interest in the trading of the stock. Id. One "public-relations company," Sloane Fitzgerald Inc., sent out more than six million spams to potential investors touting the virtues of a penny stock. See id. Sloane Fitzgerald subsequently settled with the SEC and agreed to a permanent injunction and a civil penalty. See id.
48. See Statement of the Comm'n Regarding Use of Internet Web Sites to Offer Securities, Exchange Act Release No. 34-39779, 66 SEC Docket 1869 (Mar. 23, 1998).
49. 15 U.S.C. § 80b-1 (1994).
50. See Gavis, supra note 28, at 330-31.
51. See Spring Street Brewing Co., SEC No-Action Letter, [1996-1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,201, at 77,001 (Apr. 17, 1996); Daniel Everett Giddings, Comment, An Innovative Link Between the Internet, the Capital Markets, and the SEC: How the Internet Direct Public Offering Helps Small Companies Looking to Raise Capital, 25 PEPP. L. REV. 785 (1998); Mason, supra note 34, at 493-94.
52. See Internet Fraud: How to Avoid Internet Scams (last modified Dec. 17, 1998) <http://www.sec.gov/consumer/cyberfr.htm> [hereinafter Internet Fraud].
53. See id.
54. See Dep't of Commerce, Justice, State, and Judiciary, and Related Agencies Appropriations for Fiscal Year 1999: Hearing on H.R. 4276/S. 2260 Before the Subcomm. of the Senate Comm. on Appropriations, 105th Cong. 498 (1998) (statement of Arthur Levitt, Chairman).
55. See Internet Fraud, supra note 52; see also Gavis, supra note 28, at 341.
56. Internet Fraud, supra note 52.
57. See id.
58. Id.
59. See id.
60. Id.
61. See id.
62. Indeed, "noise" theory proponents argue that investors do not make entirely "rational" decisions in choosing investments but instead are susceptible to fads, rumors, and the decisions of other investors, regardless of the actual profitability of investments made by others. COX ET AL., supra note 6, at 41. The question then becomes whether any warning, in and of itself, is ever sufficient enough to deter investors from a particular investment scheme.
63. See Online Stock Fraud Brings 10 Years in Jail, ASIAN WALL ST. J., Nov. 9, 1998, at 12, available in 1998 WL-WSJA 22040545; Schroeder & Buckman, supra note 36, at C1.
64. See, e.g., Brooker, supra note 1, at 187, 192.
65. See Cruz, supra note 39, § 6, at 3.
66. See Brooker, supra note 1, at 187-92.
67. See Internet Fraud, supra note 52.
68. See 15 U.S.C. § 78o (1994); see also supra text accompanying note 12.
69. Internet Fraud, supra note 52.
70. See BEAVEN, supra note 3, at 39.
71. A "boiler-room" is a penny stock firm that uses high-pressure tactics, usually involving telephone solicitation, to sell its inventory and create a market for its stock. Id. at 182.
72. See id. at 104.
73. See Brooker, supra note 1, at 198. Additionally, state securities enforcement divisions often encounter jurisdictional problems in trying to prosecute alleged Internet securities con artists. See id.
74. See Online Stock Fraud Brings 10 Years in Jail, supra note 63, at 12; see also SEC Internet Fraud Sweep Results in Actions Against Stock Promoters, 30 Sec. Reg. & L. Rep. (BNA) 1565 (Oct. 30, 1998).
75. See Schroeder & Buckman, supra note 36, at CI.
76. See Merry Mayer, SEC Sets Up Team to Battle Net Fraud, NEWSBYTES NEWS NETWORK, Sept. 24, 1998, available in 1998 WL 11727254.
77. See id.
78. See id.
79. See Brooker, supra note 1, at 187.
80. See Schroeder & Buckman, supra note 36, at C1.
81. Gavis, supra note 28, at 325.
82. See Use of Electronic Media for Delivery Purposes, Securities Act Release No. 7233, 60 Fed. Reg. 53,458 (Oct. 13, 1995); Gavis, supra note 28, at 328.
83. See Use of Electronic Media for Delivery Purposes, 60 Fed. Reg. at 53,460; Gavis, supra note 28, at 329.
84. See Use of Electronic Media for Delivery Purposes, 60 Fed. Reg. at 53,460; Gavis, supra note 28, at 330.
85. See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Exchange Act Release No. 33-7288, 61 Fed. Reg. 24,644 (May 15, 1996); Gavis, supra note 28, at 334.
86. See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, 61 Fed. Reg. at 24,647; Gavis, supra note 28, at 335.
87. Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, 61 Fed. Reg. at 24,647.
88. Id.
89. See Mason, supra note 34, at 491-96.
90. See id. at 491; see also Gavis, supra note 28, at 337.
91. See Mason, supra note 34, at 492; see also Gavis, supra note 28, at 338. While Spring Street and Wit-Trade voluntarily complied with the SEC and thus avoided the taint of illegitimacy, the Spring Street scenario illustrates the dangers of online trading of penny stocks. See id. The stocks are risky simply because the existence of an alternative online trading market such as that of Wit-Trade is not very different from the traditional over-the-counter market that is conducted broker to broker. See supra text accompanying note 12.
92. See Mason, supra note 34, at 493-94.
93. See id. at 494.
94. See id.
95. "Sophistication" is a relative term in securities law-it is typically used as a requirement for a certain type of purchaser in conjunction with private offerings of securities. See COX ET AL., supra note 6, at 392. Essentially, the "sophistication" standard, as it relates to private offerings under the '33 Act, requires that prospective purchasers of a security have a certain level of income, have access to information from the issuer comparable to that found in a registration statement, and have "sufficient knowledge and experience in business affairs to enable the purchaser to evaluate the risks of the investment." Mark v. FSC Sec. Corp., 870 F.2d 331, 336 (6th Cir. 1989).
96. Statement of the Comm'n Regarding Use of Internet Web Sites to Offer Securities, Exchange Act Release No. 34-39779, 66 SEC Docket 1869 (Mar. 23, 1998).
97. Id. at 1870.
98. See id. at 1871.
99. See id.
100. Id. at 1870. Of course, the "jurisdictional tests" spoken of by the SEC may prove very difficult to apply in practice, as the Internet is not actually located in any one place but is instead a word used to describe a worldwide network of interconnected computers. See Gavis, supra note 28, at 373. Hence, it is difficult to assert that solicitations or sales occur in any one locality.
101. Although, as Gavis notes, market participants will become increasingly involved in a variety of roles through the Internet, as was the case with Spring Street, which acted as both the issuer and market-maker for its stock. See Gavis, supra note 28, at 375. Such "blurring of distinctions," as Gavis terms it, has previously been the domain of "boiler-room" firms who sought to promote their own inventory of penny stock for worthless companies that the firms had themselves created. Id.; see BEAVEN, supra note 3, at 51; see also id. at 185 (defining "shell company").
102. See Statement of the Comm'n Regarding Use of Internet Web Sites to Offer Securities, Exchange Act Release No. 34-39779, 66 SEC Docket 1869, 1870 (Mar. 23, 1998).
103. See, e.g., Mason, supra note 34, at 497.
104. See Brooker, supra note 1, at 187.
105. See id. at 198.
106. See id.
107. See id.
108. Silicon Investor (last modified Mar. 31, 1999) <https://www.siliconinvestor.com/subject.aspx?subjectid=24628>.
109. See id. The "Scammy Awards" were presented via the techstocks website on February 25, 1999, which, not coincidentally, was the same night as the Grammy Awards. See id.
110. Brooker, supra note 1, at 198.
111. See id. at 198, 200.
112. Id. at 200. Notably, Shell investigated a mining company entitled "Mountain Energy" that claimed to own a tract of land worth two hundred million dollars but which, following Shell's investigation, proved to be worth a paltry one hundred thousand dollars. See id. Following a warning posted by Shell on Silicon Investor's website, shares of Mountain Energy plummeted from one dollar and seventy cents to twenty-two cents. See id. Investors who had already purchased shares in Mountain Energy were subsequently outraged at Shell for depressing the value of their stock, and then at Mountain Energy when the SEC halted the trading of its stock and the company shut its doors, dismissed its employees, and disconnected its telephone. See id. The SEC has not presently filed an action against Mountain Energy but is monitoring it. See id.
113. See id. at 202; FBN Associates (visited Aug. 30, 1999) <http://www.magnetdiary.com/fbn/> (announcing the IPO of bogus company FBN Associates); see also Silicon Investor, supra note 108 (appearing to solicit investment in bogus company FBN Associates).
114. "FBN" stands for "Fly By Night." See Brooker, supra note 1, at 202.
115. FBN Associates, supra note 113.
116. The site is, in fact, quite impressive and, as Brooker notes, is seemingly legitimate except for one small tip left by Shell-a link to a news release that proudly announces, "FBN Associates to receive Papal blessing. Company journeys to Vatican for ceremonies." Id.; see Brooker, supra note 1, at 202.
117. See Brooker, supra note 1, at 202.
118. See id. at 198. While the cybervigilante groups may be an extreme example of the cynicism of investors concerning the SEC's enforcement efforts against online penny stock fraud, they are not alone. Investors complain that by the time the SEC actually pursues an action against penny stock con artists, the company, the con artist, and the investors' funds have disappeared. See id. However, while the medium of the Internet may be new for penny stock scams, the complaints of investors regarding slowness of SEC enforcement actions is well established. Cf. BEAVEN, supra note 3, at 53-54 (discussing Hughes Capital, a penny stock).
119. Brooker, supra note 1, at 187.
120. See Scams Affecting Consumers, supra note 35, at 33 (statement of Hon. Robert Pitofsky, Chairman, FTC).
121. See MacMillan, supra note 44.
122. See 17 C.F.R. § 240.3a51-1 (1998).
123. See Hernandez, supra note 16, at 34.
124. See, e.g., Brooker, supra note 1, at 187; see also SEC Charges 44 Stock Promoters in First Internet Securities Fraud Sweep (last modified Oct. 28, 1998) <http://www.sec.gov/news/netfraud.htm>.
125. See, e.g., Brooker, supra note 1, at 187; see also SEC Charges 44 Stock Promoters in First Internet Securities Fraud Sweep, supra note 124.
126. See MacMillan, supra note 44.
127. For instance, investors may not even be aware of the websites of the SEC or FTC. The testimony of Barry D. Wise, a certified public accountant, provides a disturbing but likely all too common example of the manner in which many investors approach Internet investment opportunities. According to Wise, he simply conducted his investigation of Fortuna Alliance, an investment "opportunity" that turned out to be a pyramid scheme, by "carefully studying" the site and making his determination to invest based on what he found out from Fortuna's own Web page. Scams Affecting Consumers, supra note 35, at 25. Although such evidence is anecdotal, it is nevertheless instructive in understanding the way many consumers and investors accept information posted on the Internet at its face value.
128. That is, in order to take advantage of the SEC's website, one must know it exists in the first place. The testimony of Barry D. Wise demonstrates that most investors do not even know enough to not accept information posted on the Internet at its face value. See id.
129. See Levitt, supra note 21, at *1.
130. COX ET AL., supra note 6, at 7.
131. Id.
132. Levitt, supra note 21, at *2. Although, to be fair, some critics might applaud a less paternalistic approach from the SEC in protecting investors. See COX ET AL., supra note 6, at 13.
133. Levitt, supra note 21, at *1.
134. Id. at *3.
135. Id. at *2.
136. See Brooker, supra note 1, at 188. Probably just as compelling a reason for the popularity of Internet stock scams is the ease with which penny stock promoters can disseminate solicitations and obtain low-cost advertising. See id. at 187; see also Dugas, supra note 38, at 5B.
137. The complaints number over 100 per day. See Brooker, supra note 1, at 187. For more information about the exploding number of Internet stock scams and the SEC's difficulties in stemming the tide of scams affecting investors, see also Mayer, supra note 76, and Timothy O'Brien, Stock Hucksters Thrive on the Web, N.Y. TIMES, Aug. 23, 1999, at A1.
138. The problem is reflected, as discussed in Parts II.A. and II.B.2. of this Note, by the variance in the number of investor complaints to the SEC and the number of actions that have been filed-that is, 30 SEC actions per year to over 100 complaints per day. See, e.g., Brooker, supra note 1, at 187. But see Joseph F. Cella III & John Reed Stark, SEC Enforcement and the Internet: Meeting the Challenge of the Next Millennium, 52 BUS. LAW. 815, 835 (1997), for a diametrically opposite view regarding the sufficiency of current SEC "antifraud weapons." Despite the apparent attempts of "a lot of guys layin' down a lot of rules and regulations," id.-presumably referring here to the SEC-it is obvious from the burgeoning amount of securities fraud now conducted over the Internet that the present antifraud measures are inadequate to deter would-be stock hucksters or to sufficiently warn investors.
139. Levitt, supra note 21, at *2.
140. See 17 C.F.R. § 240.3a51-1 (1998).
141. See generally Brooker, supra note 1.
142. See supra Part II.C.
143. See supra Part II.B.2.
144. See supra Part II.A.
145. See Cruz, supra note 39, at 3.
146. See id.
147. Competition from the capital markets of other countries has been a major factor in the SEC's promulgation of rules that make registration requirements less onerous for foreign issuers than for U.S.-based companies. See COX ET AL., supra note 6, at 322-23.
148. Securities regulation in the United States is "unrivaled anywhere else" and "most other industrialized countries do not maintain the level of enforcement staffs as regularly police American securities markets." Id. at 30.
149. See James D. Cox, Rethinking U.S. Securities Regulation in the Shadow of International Regulatory Competition, 55 LAW & CONTEMP. PROBS. 157, 161 (1992). According to Cox, foreign issuers are generally far less eager to expose themselves to U.S. securities regulation because of the perceived additional transaction costs in doing so. See id. at 183. In support of his argument, Cox cites the example of Japanese issuers who choose to list on the London Stock Exchange rather than on any U.S. exchange: The far larger number of Japanese firms listing their shares on the London Stock Exchange . . . is consistent with the view that Japanese companies (and certainly other foreign issuers) do not find that the benefits of listing their shares in the United States provide sufficient reward for the additional disclosure duties and associated costs. . . .
. . . .
Both the reluctance of foreign issuers to list their shares for trading in the United States and the larger number of U.S. issuers who raise capital abroad point to a single financial truth: the overall rewards of investing and raising capital abroad are greater than the discounting that occurs due to less demanding foreign disclosure standards.
Id. at 183-84 (citations omitted).
Of course, one may very well question the validity of Cox's arguments, which were made prior to the explosion of Internet trading, in today's capital markets. While the spectre of U.S. securities regulation may continue to haunt some foreign issuers, it is difficult to imagine that a great many foreign issuers would not want to take advantage of the robustness and fluidity of current U.S. markets.
Additionally, as noted before, the problem of jurisdiction for SEC and state securities enforcement actions complicates matters greatly, since foreign issuers may argue that the SEC's heavy regulatory hand overstepped its boundaries. See supra note 100.
150. See Brooker, supra note 1, at 187.
151. See id. at 202.
152. 17 C.F.R. § 240.3a51-1(1998).
153. See supra note 12.
154. Charting commercial use of the Internet is inherently problematic since it is not taxed or highly regulated but, according to Senator Glenn, the "Internet market exceeded $1 billion in 1995 and . . . [will] grow by the year 2000 to more than $23 billion." Scams Affecting Consumers, supra note 35, at 3.
155. See 17 C.F.R. §§ 240.15g-1 to -100 (1998).
156. See 17 C.F.R. § 240.3a51-1.
157. See Hernandez, supra note 16, at 34.
158. Hernandez, supra note 16, at 33-34 (footnotes omitted).
159. Id. at 34; see also BEAVEN, supra note 3, at 51-52 (describing a typical market manipulation scheme). Usually, the "issuer" is nothing more than a shell company created by the penny stock firm which artificially inflates the price per share of the issuer and then "dumps" the stock when the firm decides it has sold all the shares it has in its inventory and therefore cannot raise the price any further. The price is inflated by aggressive cold calling to unsophisticated investors. See id. The investors are then left with the worthless shares. See id. Using a net capital standard would, in theory, expose the thinly capitalized nature of the issuer as well as make it more difficult for stock promoters to evade the penny stock definition. See Hernandez, supra note 16, at 33-34.
160. See Hernandez, supra note 16, at 33-34.
161. 17 C.F.R. § 240.15g-100 (1998). Of course, the counterargument is that broker-dealers, faced with heavier regulations and liabilities for Internet offerings of penny stocks, will either refuse to offer penny stocks altogether or will raise the price of conducting penny stock offerings so much so that small issuers will effectively be barred from raising capital through penny stocks. However, such arguments suffer from the weakness of relying on speculating about what broker-dealers might or might not do, and do not reflect the present reality that despite the SEC's numerous actions against brokers and broker-dealers for fraudulent offerings of penny stocks, the small-cap market continues to flourish. See generally BEAVEN, supra note 3; see also Brooker, supra note 1, at 188.
162. A "pop-up" screen is a screen of text or graphics, or both, that appears when a site is accessed.
163. A "password" system could resemble that of IPONet, see supra text accompanying note 92, except that anyone who wished to purchase penny stocks from an issuer or broker-dealer would be required to take this extra step. See Mason, supra note 34, at 494.
164. 17 C.F.R. § 240.15g-100.
165. Id.
166. Perhaps something similar to the dollar limitations of Regulation D of the '33 Act. 17 C.F.R. § 230.501 (1998).
167. See COX ET AL., supra note 6, at 4.
168. 15 U.S.C. § 78o (1994).
169. See Brooker, supra note 1, at 202. Brooker states that the "maximum penalty" for Matthew Bowin would be eight years in prison, but Bowin actually received a ten-year sentence from Santa Cruz County Superior Court. Id. at 202; Online Stock Fraud Brings 10 Years in Jail, supra note 63, at 12. However, Bowin will only serve four-and-a-half years before he is eligible for parole. See Online Stock Fraud Brings 10 Years in Jail, supra note 63, at 12.
170. See 15 U.S.C. § 77k (1994).
171. 425 U.S. 185 (1976).
172. 15 U.S.C. § 78j (1994).
173. See COX ET AL., supra note 6, at 697. Hochfelder's scienter requirement was later extended to SEC injunctive actions in SEC v. Aaron, 446 U.S. 680 (1980). See COX ET AL., supra note 6, at 698.
174. Hochfelder, 425 U.S. at 193 n.12.
175. 15 U.S.C. § 78j (1994).
176. Of course, revision of the Exchange Act Rules or sections would necessitate congressional action. Given the prevalence of fraud, however, such action is certainly warranted.
177. 18 U.S.C. § 1343 (1994).
178. COX ET AL., supra note 6, at 959 (emphasis in original).
179. See id. (discussing United States v. Parker, 839 F.2d 1473 (11th Cir. 1988)).
180. See id. (discussing United States v. Simon, 839 F.2d 1461 (11th Cir. 1988)).
181. See Brooker, supra note 1, at 188.
law.indiana.edu |
