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
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
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.