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U.S. Securities and Exchange Commission

Supplementary Material for Microcap Fraud Measures:
Statement of Chairman Arthur Levitt at the Open Commission Meeting

February 19, 1999

Good morning. Today, this Commission takes a determined step forward to combat fraud and manipulation in the area of "microcap" securities. It is part of an important, far-reaching campaign to help stamp out dangerous and abusive practices in the trading and selling of low-priced stocks.

Microcap securities provide legitimate opportunities for small and new businesses to raise capital. Unfortunately, they also give the unscrupulous greater license to prey on innocent investors. The reason is straight forward: information about smaller companies is much more difficult to find and obtain than information about larger companies. And, when reliable information is scarce, the potential for fraud increases.

High-pressure cold calling, unauthorized trading in a customer's account, and stock manipulation schemes provide the means to cheat investors out of their life-savings. The Commission has undertaken a four-pronged approach to address this behavior.

First, we have intensified examinations and inspections of broker-dealers who trade in microcap securities. Second, we have increased the coordination of enforcement efforts with law- enforcement, the states and self-regulatory organizations. Third, we have implemented and continue to propose regulations to strengthen disclosure and regulatory oversight of low-priced stocks that trade in low volumes. And fourth, we have dramatically stepped-up our efforts to inform investors on what practical steps they can take to spot securities fraud.

Today's measures represent the last two areas – regulatory oversight and investor education. Taken individually, these targeted measures will increase the amount of information available to investors, close avenues which have been exploited by some to ruthlessly and irresponsibly promote a certain stock, and reaffirm the important role that investors play in protecting themselves.

In undertaking this action, we are sensitive to any inadvertent impact it may have on the liquidity of thinly traded issues. And, I believe we are striking a balance between capital formation and investor information. This agency's mandate is to protect investors – and stronger regulation in this segment of the market is essential to fulfilling that mission.

Teddy Roosevelt, nearly a hundred years ago stated, "We draw the line against misconduct, not against wealth." Our efforts to combat microcap fraud is a further demarcation of that line.

There are few undeniable truths when it comes to investing in our markets. But surely one is that the best, most effective protection an investor can provide for himself is awareness. No amount of regulation – however omnipotent or ubiquitous – will completely replace an individual investor's power to ask questions and demand truthful answers.

In that vein, the Commission is doing everything it can to give investors the tools they need to make informed investment decisions. In addition to the regulatory initiatives taken today, we are also releasing a new investor education brochure giving investors tips on how to detect and avoid microcap fraud.

Every day, more and more Americans are investing in our markets. They invest in the hope they will be able to own a house someday, or send their child to college or retire comfortably so they won't be a burden on their families. Dishonest dealers not only undermine public confidence in the integrity of our markets, they damage the hopes and dreams of thousands of hard-working families.

Before I conclude, I want to acknowledge the staff from the Divisions of Corporation Finance, Enforcement, Market Regulation and the Office of Investor Education and Assistance for their work. These measures reflect a thoughtful effort and I thank them for their teamwork.