Legitimate Small Cap Industry Applauds SEC Crackdown On Unprincipled Promoters
(PCQuote.com / Source: FinancialWire)
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February 4, 2005 (FinancialWire) In a move applauded by thousands of struggling and legitimate small public companies trading on the bulletin board and pink sheets that have been besmirched by the illegal manipulations of a relatively small number of stock promoters, the U.S. Securities and Exchange Commission is taking a new aggressive tact to stop often fraudulent and blatant fax and email promotions in their tracks.
The SEC has temporarily suspended trading in Commanche Properties (OTC: CMCH), Mosaic Nutriceuticals (OTC: MCNJ) and Courtside Products (OTC: CSDP) due to alleged pump and dump schemes. FinancialWire had covered the nearly one dozen "promotional" newsletters and touters that helped to kick off the recent Isonics (Nasdaq: ISON) craziness that lifted it to the top of the most actively traded issues for weeks, coupled with the ensuing exercise and sale of massive numbers of warrants, and only after it was over did a regulatory agency step in to make inquiries.
The "Investors Resource Center" at Investrend Information (http://www.investrendinformation.com) and partner StockPatrol (http://www.stockpatrol.com) have spotlighted scores of such promotions, most recently related to uAuthorize Corp. (OTC: UACP), with only sporadic responses from the SEC.
"This is a very positive step," said Drew Connolly, executive director of The CEO Council (http://www.ceocouncil.net), an organization representing small-cap and micro-cap public companies that advocates standards and good governance practices. "The SEC's actions could help to rid the industry of some very dubious promotional groups that habituate this sector," said a CEO Council founder.
According to the Dow Jones (NYSE: DJ) Wall Street Journal, "the move is part of the agency's broader attempt to get ahead of possible fraud before it becomes widespread."
"The agency is expected to suspend trading in several other companies within the coming weeks and months, according to people familiar with the matter."
Monday the SEC halted trading in Commanche Properties, whose last press release before the trading halt, stated in what has to be a surreal moment in financial annals: "Commanche Properties Inc. Contracts with Famed Bonanno Family Member to Produce Three Film Products." Yes, before you inquire, it is in fact "that" family, as the deal names as its partner, Salvatore "Bill" Bonnano, "the eldest son of the late Joseph Bonanno, who for decades headed one of the New York Mafia's 'Five Families'." Points awarded for transparency.
"At issue is the potential for so-called pump-and-dump schemes, whereby speculative investors, company insiders or others try to inflate demand for a stock by trumpeting positive-sounding information about a company -- typically via e-mail -- and then cash in their shares at the higher price. Often the information is false and the stock quickly declines again," explained the Journal.
The SEC said that each week, the SEC's internet enforcement division, headed by John Reed Stark, gets thousands of complaints from investors "about spam email plugging stocks and other investments."
"We want to head off possible damage to shareholders before it occurs," John Reed Stark, chief of the SEC's office of Internet enforcement, was quoted as saying.
Investigators want to determine whether the ultimate goal in many of these instances is to "artificially stimulate demand for the stock and then dump shares once the price increased." The SEC hastened to add that it is not asserting that many of the companies themselves are involved in the schemes. Often they are just bystanders, but sometimes it results from stock issued to offshore and even "promotional" sites and email and fax originators to create "visibility," and the promoters often violate their promises to the companies to sit on the shares.
"Under certain circumstances, an improper stock distribution in violation of SEC regulations can be a prelude to a manipulation," Peter Bresnan, an associate director in the SEC's enforcement division, was quoted as saying.
According to the Journal, "Tolan Furusho, an attorney for Courtside, said the firm was approached by stock promoters who convinced the company to go public and promised a cash infusion of up to $1 million. In exchange, Courtside gave 7.5% of its shares to the promoters."
"This was a mom-and-pop shop and they saw it as an opportunity to expand production and marketing and go a little deeper into the sports-equipment business," the Journal quoted Furusho as saying.
"The promoters gave Courtside a legal opinion stating that the company could rely on the SEC exemption and avoid registering with the commission, Mr. Furusho said. Courtside then issued shares to the promoters but received no cash and soon learned that a fax and e-mail campaign touting its stock was under way."
The CEO Council said it has heard of dozens of similar instances where legitimate business developers are exploited along with the public by such unprincipled lenders. Lawsuits to recover shares issued under such false promises is common in the industry.
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