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Zombie stocks can haunt investors

By the time the government suspended trading in shares of Fantom Technologies last month, more than a decade had passed since the company filed mandatory reports telling investors and regulators how it was doing financially, according to the Securities and Exchange Commission.

The silence left potential buyers and sellers of Fantom stock in the dark about the business — and at heightened risk of making bad investment decisions.

Then again, there wasn't much to say.

Fantom Technologies discontinued operations in 2002, former chief executive Allan Millman said.

By the following year, an anonymous scribe had posted a warning on the Internet: "Fantom Technologies is a Ghost!"

Fantom is one of many zombie stocks that have continued trading long after falling out of compliance with basic SEC disclosure requirements. Some have been delinquent since the 1990s, according to SEC records.

The SEC stepped up its attack on the zombies this year, linking them to several types of scams. About 1,200 companies are delinquent by more than a year, according to the SEC. But it takes time and effort for the SEC to stop the trading in these companies' shares, even if they are on regulators' radar.

The agency has "insufficient resources to get to all of them," so it prioritizes on the basis of the threat to investors, giving highest priority to cases in which fraud appears ongoing or imminent, said SEC spokesman John Nester.

Zombie stocks typically trade far removed from major markets such as the New York Stock Exchange. Actual sales may be few and far between. And when the stock changes hands, it may be for fractions of a penny per share. For example, Fantom Technologies' shares last traded in March, when the stock closed at two-hundredths of a penny.

With prices so low, it's easy for shares to soar or plunge in value by huge percentages. And with such anemic demand for the shares, investors who buy can't be assured they will be able to sell their holdings.

Those circumstances can leave investors especially vulnerable to manipulation, according to the SEC. Unscrupulous traders can fill the vacuum with hype and misinformation.

It's a classic scam known as the "pump and dump."

"The problem is when someone sends out an e-mail that says, 'Hey, this company has invented the Internet, or the next Internet,' " and there is no authoritative information out there to provide a reality check, said Cromwell Coulson, president of OTC Markets Group.

OTC Markets runs an online marketplace for stocks that do not trade on major exchanges.

When OTC Markets hears that someone is hyping a stock, it displays a skull and crossbones beside it — to warn investors that "there may be pirates around," Coulson said.

Zombie stocks can haunt investors 06/23/11 [Last modified: Thursday, June 23, 2011 9:15pm]
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