The Securities and Exchange Commission recently announced further actions in its ongoing microcap fraud-fighting campaign. The commission suspended trading in 255 dormant shell companies which were seen as “ripe for abuse” in the over-the-counter market.
The suspensions came as a part of the SEC’s “Operation Shell-Expel,” which is an ongoing anti-fraud initiative against the manipulation of microcap shell companies. The commission’s concern is that these smaller firms are ripe for fraud as they lay dormant in the over-the-counter market. These vulnerable microcap companies are suspended to prevent so-called pump and dump schemes, which are among the most common types of fraud involving empty shell companies. By suspending the trading in these companies it obligates them to provide updated financial information to prove they are still operational, essentially rendering them useless to scam artists.
“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.”
Once a stock has been suspended, it is unable to be relisted unless the company can prove it is still operational. However, the SEC has said such resumptions in trading are “extremely rare.”
“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-Expelis both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”