SEC Takes Action to Minimize Microcap Fraud: Targets Hundreds of Shell Companies

Recently, the Securities and Exchange Commission released a statement concerning its continued efforts to minimize the risk of incidents of microcap stock fraud. Since its inception in 2012, the SEC’s fraud-fighting initiative, Operation Shell-Expel, has made strides toward ensuring that microcap fraud is reduced to the greatest degree possible. One way the SEC is working to this end is by forming the Microcap Fraud Task Force in 2013. The primary purpose of this task force is to focus on attorneys, brokers, and others who tend to be serial offenders of microcap scams. Also of grave concern to the SEC is that often times these dormant shell companies are attractive opportunities for organized crime to capitalize on these shell companies.

One recent major effort to crack down on this particular type of fraud is the SEC’s Enforcement Division’s Office of Market Intelligence suspension of trading in 255 dormant companies that they believe are a high risk for over-the-counter market fraud. This suspension in trading prevents those who commit fraud from manipulating these shell companies.

Microcap stocks differ from other stocks in that they are generally defined as those with a market capitalization of under $250 million. Usually the smaller a company is, the greater the risk when investing in them. These companies usually don’t meet the requirements of traditional stock exchanges therefore they are usually traded through OTC Bulletin Board or the pink sheets. Often these microcap fraud set-ups include the use of the Internet and various types of social media to pull off such schemes.

One of the most common types of fraudulent plans involving microcaps is called pump-and-dump, although this is just one of several unscrupulous methods used. Some disreputable advisors or other administrators of stocks will promote microcap stock to the market by making false or misleading statements about a given microcap company. They manipulate the price of stocks by purchasing stocks at a lower price and then sell them when the price goes up as a result of their hype. This provides them with huge profits by selling at inflated prices.

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

The scope of this trading suspension is tremendous, as it involves dormant shell companies in 26 states and two foreign countries. This type of suspension is successful in reducing microcap fraud because once suspended from trading, a stock cannot be relisted without financial documentation that shows a company is operational. It is quite uncommon for a company to meet this stipulation. Since this seldom occurs, the trading suspension causes the shell company to become basically worthless, therefore unable to meet the need of those who would perpetrate this type of fraud.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence. “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

If you have suffered losses as the result of the unsavory practice of microcap fraud, please call the Blum Law Group at 877-STOCKLAW or visit us online at We can offer you a free case evaluation and work on strictly a contingency basis.

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