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In suspending record 379 shell companies, SEC tries to stem pump-and-dump fraud

The federal government defused hundreds of potentially explosive devices last week that could have proved dangerous — to Florida investors. The Securities and Exchange Commission suspended trading in 379 dormant public companies before they could be hijacked by fraudsters. How could investors be harmed? By get-rich-quick scammers using reverse mergers and pump-and-dump schemes at the cost of naive investors wowed by promises of big returns. These 379 companies are the most ever suspended by the SEC in a single day. Among them are such once famous legends as typewriter giant Smith Corona, supercomputer phenom Cray Computer and formerly glamorous Trans World Airlines. All have since faded to empty shell corporations. Others are mostly small-fry companies scattered nationwide. Plenty were founded or operated in Florida and include once-promising Tampa Bay companies like IMC Mortgage and Vision Twenty-One.

These so-called microcap companies had retained their trading status and ticker symbols as penny stocks listed on pink sheet and over-the-counter markets.

"Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade," Robert Khuzami, director of the SEC's division of enforcement, stated last week.

The SEC dubbed last week's crackdown Operation Shell-Expel. The agency said it targeted "clearly dormant" shell companies in Florida and 31 other states and six foreign countries that were "ripe for potential fraud."

Putting an end to more shell companies as potential tools for fraudulent trading is good news, of course. Many are delinquent in their public disclosure responsibilities.

But not all shells are bad. Legitimate small, private companies sometimes buy them in "reverse mergers'' — where buying companies adopt the acquired's public trading capabilities — as easy ways to issue stock and find investors.

Call it a poor man's IPO.

Too often, shells devolve into tools to "pump and dump" shares. Perpetrators first inflate the value of the shares with fictitious press releases and, when market activity in the stock picks up, they dump them near their price peak. Unwitting investors often are left with worthless shares.

This time around, the SEC targeted several Tampa Bay shells, companies that in their heyday were routinely covered in the business pages of this newspaper.

In the 1990s, IMC was an up-and-comer in the business of providing mortgages to folks with tarnished credit. By 1998, IMC approached 3,000 employees and ranked fifth in the Tampa Bay Times' annual ranking of the top 50 best performing public companies in Tampa Bay. The company was so hot that by the late 1990s the giant financial services company the Travelers Group decided to invest $50 million in IMC with the option to add $30 million more. But within two years, investors lost faith in IMC's lending. It faded quickly. Shares in IMC Mortgage are currently valued, barely, at 0.0004 cents

At its peak in late 1998, Vision Twenty-One boasted revenues of $240 million, 170 clinics in 14 states and more than 5,700 doctors in its managed care network. Then it crashed.

"We ended up overleveraging," founder Dr. Ted Gillette told the Times back then. "When the equity side got whacked as the appetite for the stock dropped, we couldn't meet the bank covenants. There were poor decisions on my part as CEO."

Gillette unwound the company. The remains migrated to another owner in Baltimore, where it later became a shell.

Dynamic Leisure Corp. enjoyed an $8 stock price in 2003 but saw shares drop to 2 cents by 2008 in the wake of allegations the travel agency company bilked its customers. Under regulatory investigation, the company declared bankruptcy that same year.

Excal Enterprises, known earlier as the tire-balancing firm Assix International, was accused by the SEC as far back as 1995 of hiding financial losses, filing inaccurate records and lying to company auditors.

By 2002, Excal terminated its public company registration with the SEC because the business had fewer than 300 stockholders. Excal stated then that its stock would be de-listed from the over-the-counter bulletin board. It wasn't, until the SEC moved in last week.

Among the hundreds of other suspended microcap stocks were such Florida companies as 1-800-Attorney in Lake Helen, Biomedtex in Boca Raton, ChemiCorp in Coral Gables, Clinicorp in West Palm Beach and Hi-Rise Recycling Systems and Florida Partners Corp., both of Miami.

The SEC says stock manipulators will pay as much as $750,000 to assume control of a shell company to pump and dump its shares. Last week's trading suspensions require each targeted company to provide updated financial information to the agency before trading of their shares can be reconsidered.

In effect, the move renders these companies worthless to scam artists.

Will eliminating these 379 shells from the nation's inventory of many thousands of defunct companies with trading capability really help? I'd like to think so. Investors might want to work on being less gullible, too, if they choose to put money in high-risk penny stocks.

The SEC is clearly fighting a too-little, too-late image when it comes to cracking down on potential securities fraud. The SEC's largest previous action against shells suspended trading in just 39 companies — in September 2005.

Zapping 379 companies in one day sends a message that it's trying to show more serious oversight.

We'll see.

Robert Trigaux can be reached at trigaux@tampabay.com.

In suspending record 379 shell companies, SEC tries to stem pump-and-dump fraud 05/19/12 [Last modified: Saturday, May 19, 2012 4:31am]
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