Tag: Reverse Merger

Penny Stock Fraud – Why Penny Stock Email Promotions Are Bad For You

SEC Logo
SEC cracks down on microcap securities fraud.

Like me, you may get bombarded with long email ads for some penny stock.  They always tout how the stock is about to break out from $0.01/share to $0.05 or $10.00/share.

Did you ever get the sense that these may be scams.  Gadzooks!  Say it ain’t so!

The SEC today announced fraud charges and an asset freeze against the promoter of AwesomePennyStocks.com, a frequent trash dumper into my email accounts.

It charges that John Babikian used his sites for a “scalping” scam with the stock of America West Resources Inc. (AWSRQ).  AWSRQ was low priced and thinly traded.  Babikian fired off about 700,000 emails touting the stock.  However, he failed to disclose that he owned 1.4 million shares of AWSRQ and was ready to sell them through a Swiss bank.  The stock took off, and he made “ill-gotten” gains of more than $1.9 million.

The Babikian case is another example of the SEC’s focus on microcap stock fraud.

“The Enforcement Division, including its Microcap Fraud Task Force, is intensely focused on the scourge of microcap fraud and is aggressively working to root out microcap fraudsters who make their living by preying on unwitting investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

Proving that the SEC has some teeth when it needs them,

The court’s order, among other things, freezes Babikian’s assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery.  Pursuant to the order, the SEC has taken immediate action to freeze Babikian’s U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

 

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

  • Publicity from being public
  • Transparency
  • Time to market, merger done in three weeks
  • They wanted to be the first public Bitcoin company
  • Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Logo - Bitcoin
Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes.  To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

 

Microcap Fraud Crackdown Continues At SEC

SEC’s efforts to combat microcap fraud continue as it suspends trading in dormant shell companies. Commence Operation Shell-Expel!

One favorite technique of microcap fraud operators is to use shell companies as vehicles for pump-and-dump schemes. The SEC has tried over the years to clamp down on operators who take advantage of unsuspecting investors through these types of companies. For example, the SEC recently announced a microcap fraud task force to deal with fraud involving microcap securities.

Securities and Exchange Commission
Securities and Exchange Commission cracks down on Microcap Fraud.

In this regard, the SEC has also announced that it has taken a proactive step in its shell company enforcement. It has suspended trading in 255 dormant shell companies of the type it describes as “ripe for abuse in the over-the-counter market.”

“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.”

Operation Shell-Expel has been in effect since 2012. The SEC has been scrutinizing penny stocks and looking for inactive companies. Trading is then suspended until updated financials are provided. Since this is generally unlikely, the trading suspension ends the value of the dormant company to scammers.

Due to the number and low profile of dormant companies, enforcement this sector can be a challenge.

“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.”

 

 

Recent Case Shows How Little The SEC Appreciates The Beauty* Of A Reverse Merger

*Beauty Is in the eye of the stock promoter.
SEC v. Sierra Brokerage, et al.

Many of the arguments in the case are procedural, but the basis of the case involves Tsai, who created shell companies for reverse mergers.  As part of the process, Tsai would distribute the shares to his buddies to spread out the holdings in order to qualify for OTC trading.  Tsai also had stock powers from these people that allowed him to redistribute the shares in the reverse merger.

Tsai’s ability to reclaim the shares at a reduced price constituted “control” over the shareholders in addition to his control over the company and made them all “affiliates.”  According to the SEC and the court, this made him an underwriter and Rule 144 unavailable.  Thus, the distribution was a violation of the registration requirements of the 33 Act.

But wait, there’s more.  His failure to report the shares he controlled via the stock powers was a violation of Section 13(d) and Section 16(a) of the 34 Act (requirements to file Schedule 13Ds and Forms 3, 4 and 5).

If you want to draw broader lessons:

  • Spreading out securities holdings without an effective registration violates the 33 Act
  • The ability to repurchase shares demonstrates control
  • The ability to repurchase shares constitutes beneficial ownership and pecuniary interest for purposes of the Williams Act and Section 16 disclosure and short swing profit rules
  • The SEC still does not like reverse mergers