In Pre-emptive Move, SEC Suspends Trades in 2 Stocks...
By ELLEN ROSEN
Published: February 3, 2005
nytimes.com
The Securities and Exchange Commission, stepping up its efforts to stop penny-stock fraud in its tracks, has begun suspending suspicious trading that agency officials think could be a prelude to a market manipulation.
The S.E.C. halted trading in Courtside Products, a manufacturer of gym bags, on Friday, and in Commanche Properties, an entertainment company, on Monday. The securities for both companies, which are listed on the over-the-counter pink sheets, are restricted under S.E.C. rules and are ineligible for general trading for one year. As a result, even though only 2,200 shares of Commanche stock had changed hands, the trading raised a red flag.
"We're hoping to head off a potential pump-and-dump scheme before investors' monies are at risk," said John Reed Stark, the chief of the office of Internet enforcement at the agency. (Pump-and-dump schemes involve the false promotion of a stock, often through the use of spam; the promoters then sell once the price has spiked.)
"Historically, the commission generally executed trading suspensions in a company's stock because of questions raised about the accuracy and adequacy of publicly disseminated information about that company," Mr. Stark said. Typically, the trading suspension would occur in the middle of a spike in either price or trading volume that indicated a market manipulation. "In this instance, because of the potential failure to comply with the resale restrictions on the stock, the commission was able to act before any possible effort to manipulate the market for the stock in these two companies," Mr. Stark said.
Courtside is a 10-year-old company that markets its products under the Sport Saq name. According to Tolan Furusho, a lawyer retained by the company, a consultant approached the company last May and "promised to take the company public and increase market awareness."
For such a small company, the prospect of going public was "a big carrot," he said, and Courtside agreed to pay the consultant with company stock for his services, an arrangement typical for tiny companies that issue stock.
Courtside, which is based in Spokane, Wash., issued the shares in mid-October, and by late November, began receiving complaints that people were being inundated with e-mailed and faxed spam messages promoting the company's stock, said Lola Emter, Courtside's president. One complaint even contained a veiled threat against Ms. Emter and her family, she said.
Ms. Emter said the company "thought these people were kooky" until it realized that they were being flooded with e-mail and faxed messages. The company, which denies any involvement, is conducting its own investigation and is cooperating with the S.E.C., she said. The S.E.C. acted after spotting suspicious trading and receiving complaints about the spam.
The S.E.C. halted trading in Commanche within two weeks of the Jan. 19 announcement that it had become a public company. Joanne Tarantola, one of its two owners, declined to comment, and lawyers representing the company did not return calls. Commanche is based in Tucson.
Both companies had issued their stock under an infrequently used provision of the securities laws that governs offerings of less than $1 million. The provision - Rule 504 - exempts companies from making the filings required of other public companies. But the rule prevents resale for one year in most instances, and even when the year ends, the company still is not considered a publicly traded company under S.E.C. rules.
Commanche and Courtside have one other similarity. According to sources knowledgeable about the S.E.C.'s actions, an Arizona resident named Michael Paloma was involved in promoting both stock issues. The records filed with the pink sheets as part of the Commanche offering state that Mr. Paloma received 10 million shares as part of that company's offering without delineating his role in the company, No similar records are available for Courtside.
Mr. Paloma, who did not return a call seeking comment, was the subject of an S.E.C. enforcement action in 2002. That action accused him of securities fraud for falsely claiming that his former company, the Desert Winds Entertainment Corporation, had a contract with Warner Brothers Television and for illegally selling restricted shares. Mr. Paloma settled the case without admitting or denying the charges, and as part of the settlement, paid more than $500,000 and was permanently enjoined from further violations of the securities laws.
The S.E.C. has not charged either company or Mr. Paloma, and Mr. Stark emphasized that that the suspensions did not mean that either company committed fraud.
Trading in both stocks will automatically resume 10 days after being halted. But according to Mr. Stark, "the automatic expiration of the trading suspension should not be taken as an indication that the commission's concerns have been alleviated."
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