Dormant Shell Companies – How to Protect Your Portfolio from Fraud
Oct. 30, 2014
FINRA and the SEC’s Office of Investor Education and Advocacy are issuing this alert to warn investors that some low-priced “penny” stocks that are aggressively promoted may in fact be stocks of dormant shell companies – companies that have no or nominal business operations or non-cash assets for an extended period of time. Many dormant shell companies that continue to trade in the over-the-counter (OTC) market are susceptible to market manipulation. This alert follows action by the SEC to suspend trading in 255 dormant shell companies in February 2014 and subsequent suspensions of other thinly traded penny stocks.
Rise and Fall of the Dormant Shell Company
FINRA and the SEC continue to be concerned about pump-and-dump schemes in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to pump up the stock’s price. The fraudster then dumps his shares, causing the price to fall, leaving investors with worthless or nearly worthless shares of stock. A shell company is often used in these types of scams. These dormant shell companies may be on the brink of insolvency or even bankrupt. These companies also may not file periodic reports with the SEC that would provide public information about their business and financial condition and may no longer be in good standing in their state of incorporation. Dormant shell companies often have no officers or management. As the name implies, these companies are simply shells.
Fraudsters have been known to use dormant shell companies in pump-and-dump schemes. For example, fraudsters may buy shares in the shell company and then claim that the company has developed a “hot” new product. In some cases, the company will also announce that it has new management or corporate officers. The company may also be re-incorporated, possibly under a new name. These actions may also coincide with a reverse stock split that increases the company’s share price.
These actions often cause public communication about the once-dormant company to increase. Press releases, promotional campaigns, social media and penny stock chat rooms begin to tout the stock. (Typically, regulatory filings remain dormant.) The stock gets “pumped” back to life. Trading becomes more active, and the stock price can soar.
Unfortunately, investors drawn in by these promotional campaigns often find themselves on the receiving end of the “dump.” Fraudsters cash out by selling their shares at higher prices and reaping significant profits, while tanking the stock price and leaving investors with worthless or nearly worthless stock.
These tips can help you walk away from manipulation schemes involving stocks of dormant shell companies:
If a Problem Occurs
- FINRA Alert: Avoiding Investment Scams
- FINRA and SEC Alert: Inbox Alert—Don't Trade on Pump-And-Dump Stock Emails
- SEC News Release: SEC Continues Microcap Fraud Crackdown, Proactively Suspends Trading in 255 Dormant Shell Companies
- SEC Alert: Be Alert When You Receive Spam E-mail or Faxes And When You See "Unsolicited Quotations" Posted for Stocks
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