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ENFORCEMENT
After living through the Internet Bubble of the 1990's, most investors are familiar with the traditional IPO. It's the most widely recognized form of taking a company from private to public. However, what many people don't realize is that there are numerous other ways for private company to become publicly traded.
One widely used method is a Reverse Merger. Practitioners use a simplified, fast track method by which a private company can become a Public Company. This technique is more prevalent than most realize; in a white paper, it's estimated that approximately 53% of all companies going public in 1996 did so through a reverse listing and roughly 30% of new publicly listed companies in 1999.
During the internet boom, percentages of reverses fell because Wall Street firms had a huge appetite for IPOs, and many developmental stage companies with zero revenues and poor operational strategies were able to find their way to the public market through traditional IPOs. Reverse Mergers however in this market are poised to make a come back because of the limited number of IPOs being filed by Wall Street firms.
Reverse Mergers are also commonly referred to as Reverse Takeovers, or RTO's; however at Lion Capital Management Group, we have a process quite unique to our firm and befitting an equally unique moniker: Reverse Listings.
At Lion Capital Management Group, we want to separate from the traditional Reverse Merger pushers because there are some important risks and negatives that issuers and investors alike should be wary of when dealing with traditional Reverse Merger firms.
There is a much higher failure rate amongst these companies versus the traditional IPO. Much smaller and less successful companies are able to become public through a reverse, and many are underfunded. Often these stocks trade very inefficiently in the absence of any sponsorship or following. At Lion Capital Management Group, we have a special private placement that EVERY one of our Reverse Listing companies are channeled into a post close money raise in order to ensure that post close funding occurs.
There is a thriving cottage industry of merchant bankers and entrepreneurs who specialize in orchestrating reverse mergers. Unfortunately, there are no barriers to entry in this field. Therefore, scams are common place.
Some have developed methods to accumulate large positions in the free trading shares of shell companies. A Reverse is consummated with a marginal private company, and the agents of the deal put together a massive publicity campaign designed to create activity in the stock. Unrealistic promises and absurd claims of corporate performance find their way to the public. The enhanced trading volume allows the scam artist to dump his shares on the unsuspecting public, most of whom eventually lose their money once the newly formed public company fails. This scam is commonly known as a "Pump and Dump." Here's some recent SEC enforcement action surrounding same.
Pump and Dump Cases
http://www.sec.gov/litigation/litreleases/lr17673.htm
Securities and Exchange Commission v. Environmental Solutions Worldwide, Inc. et al., Cause No. 02-1575 JDD (D.C.)
Litigation Release No. 17673/ August 9, 2002
The SEC alleges that defendants perpetrated a massive stock fraud in the Nasdaq Over-the-Counter securities market, by issuing ESWW stock to various insiders through a sham private offering, and then "pumped" the market with a fraudulent promotional campaign, including press releases, spam e-mails, and a paid analyst report, all designed to artificially prime the market for ESWW stock. The promotional campaign had the intended effect, when ESWW stock jumped from $2 to $7 per share. Defendants then concurrently sold approximately $15 million of ESWW stock into the unsuspecting market.
The Commission's complaint alleges that based on the conduct set forth above, the defendants violated the following provisions of the federal securities laws, including Sections 5(a), 5(c), 17(a), and 17(b) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13b2-1, 13b2-2, 13d-1, and 16a-3.
The complaint seeks injunctions, officer and director bars, and disgorgement of ill-gotten gains plus pre-judgment interest as well as civil penalties.
http://www.sec.gov/litigation/litreleases/lr17305.htm
Securities Exchange Commission V. Max C Tanner et al, 02 CV 0306(S.D.N.Y.) (WHP) (January 14, 2002)
Litigation Release No. 17305/ January 14, 2002
The complaint alleges that the Defendants engaged in a pump and dump scheme involving the stock of Maid Aide, Inc. ("MDAN"), a shell company trading on the Over-the-Counter Bulletin Board ("OTC-BB"). And that as a result of this scheme, MDAN traded at artificially inflated prices ranging between $5.00 and $9.35 per share, allowing the Defendants to dump more than 475,000 MDAN shares into the market for proceeds of over $3.7 million.
The Commissions complaint charges violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder.
In addition, the complaint charges violations of Sections 5(a) and 5(c) of the Securities Act and violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act.
Commission seeks injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties. The Commission is also seeking an order barring Tanner and Evans from serving as an officer or director of any public company.
http://www.sec.gov/litigation/admin/34-49073.htm
United States of America before the Securities and Exchange Commission
Securities and Exchange Act of 1934
Release No. 49073/January 14, 2004
Admin. Proc. File No. 3-11355
In the Matter of LUIS F. LORIE
ORDER MAKING FINDINGS AND IMPOSING SANCTIONS BY DEFAULT
This Order bars Luis F. Lorie (Lorie) from participating in an offering of penny stock, he will thus be barred from acting as a promoter, finder, consultant, or agent; or otherwise engaging in activities with a broker, dealer, or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. Lorie was previously convicted of securities fraud and enjoined against violations of the securities laws based on his wrongdoing in a pump-and-dump scheme.
http://www.sec.gov/litigation/litreleases/lr18328.htm
Securities and Exchange Commission v. New Energy Corp., Tor Ewald, Geneva Financial Ltd., Marcelino Colt aka Marcelino Colt Vasquez, Magnum Financial, LLC, Michael S. Manahan, BLD Trust, Barclay Davis, Loretta Davis, Burke T. Maxfield, York Chandler, and Hector Campa Acedo, Civil Action No. CV-02-989-MMM (CWx) (C.D. Cal.)
Litigation Release 18328 / September 8, 2003
The Commission's complaint alleged that New Energy and Ewald were part of a "pump and dump" scheme to manipulate New Energy's stock price during a one-month period ending on January 18, 2002, when the Commission suspended trading. The scheme, included the hiring of Magnum to post a false and misleading buy recommendation, the distribution of mass e-mails or spam containing fraudulent statements, issuing a false and misleading press release, and placing the release onto New Energy's website.
Judgments were entered against New Energy, Ewald, Magnum, and Manahan that enjoin them from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Furthermore, pursuant to the consent of the parties, the Court entered a limited asset freeze which represent alleged ill-gotten gains from trading New Energy shares.
http://www.sec.gov/litigation/litreleases/lr18586a.htm
The SEC complaint alleges that defendants fraudulently promoted Aqua Vie's common stock by means of millions of one-page tout sheets faxed to homes and businesses. Millions of shares of Aqua Vie's common stock were offered publicly, without any registration statement in effect as to the offering. Defendants dumped millions of shares into a market reflecting demand created by the fax promotion, without disclosing the increase in the public float of Aqua Vie securities.
The Commission is seeking injunctive relief; disgorgement, pre-judgment interest, civil monetary penalties and penny-stock bar and an officer and director bar.
http://www.sec.gov/litigation/litreleases/lr18381.htm
Litigation Release No. 18381 / September 30, 2003
Securities and Exchange Commission v. 2DoTrade, Inc., George Russell Taylor, Barry William Gewin aka Barry Peters, Eric T. Landis, Dominic Roelandt, Michael D. Karsch, L. Van Stillman, David A. Wood, Jr., Clinton Walker, Oxford and Hayes, Ltd., FG & P Consulting, Ltd., Hackney Holdings, Ltd., Weston Partners, Inc., Infiniti Corporate Services, Ltd., Argo Financial, Ltd., 21st Equity Partners, Inc., MCG Partners, Inc., and LMR, Ltd., Civil Action Number 3:03-CV-2246-N (Godbey) (N.D. Texas, Dallas Division)
According to the SEC's complaint, from July to November 2001, the defendants engaged in a fraudulent scheme in which they artificially pumped 2DoTrade's stock with false press releases, spam e-mail, and a fraudulent website and then illegally dumped millions of shares into the inflated market.
The Commission's complaint alleges that defendant 2DoTrade violated sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and sections 10(b) and 13(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
It alleges that defendants Gewin, Roelandt, and Landis, and the defendant companies they controlled, violated sections 13(d) and 16(a) of the Exchange Act and Rules 13d-1, 16a-2, and 16a-3 thereunder.
The SEC seeks, among other relief, permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest, and civil money penalties against all the defendants well as other specific remedies against specific defendants.
Securities and Exchange Commission v. Craig J. Shaber, Stephen R. Wright, and Bonaventure Capital, Ltd., defendants, and Aspen International Marketing, Inc. and Wright & Geis, Inc., relief defendants. Civil Action No. 3:03-CV-2247-G (Fish) (N.D. Texas, Dallas Division).
In a separate civil lawsuit filed on the same day, the SEC alleged securities fraud and other violations against a California attorney and accountant who created and sold the public shell company used in the 2DoTrade scheme.
The violations refer specifically to sections 5(a), 5(c), and 17(a) of the Securities Act and sections 10(b), 13(d), and 16(a) of the Exchange Act and Rules 10b-5, 13d-1, 16a-2, and 16a-3 thereunder, as well as sections 13(a) of Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The SEC seeks disgorgement with prejudgment interest from each defendant and relief defendant and further seeks permanent injunctions, an accounting, and officer-and-director bars against defendants Shaber and Wright.
Reverse Mergers Cases
http://www.sec.gov/litigation/admin/34-43711.htm
Defendant created and maintained a website located at adargroup.com, offering advice regarding alternative methods for privately held companies to become public and begin trading. One of the methods described on the website is a reverse merger transaction with an existing shell company. Website claims "hands-on supervision" with respect to, among other things, locating shell companies and buyers, preparing the reverse merger transaction, performing due diligence, restructuring the corporation, and assisting with negotiation. Defendant is not registered as a broker dealer as required for such transactions.
http://www.sec.gov/litigation/litreleases/lr17665.htm
The Commission alleges the defendants participated in a scheme to sell stock to the public without registering with the Commission, thus allowing the defendants and other corporate insiders to sell millions of shares of stock into the public market without disclosing their control over the companies. The defendants, without admitting or denying the allegations in the Commission's complaint, consented to the entry of permanent injunctions against them and agreed to pay disgorgement, prejudgment interest and civil penalties.
The defendants were in the business of creating shell companies -- also known as blank check companies -- with no operations and no existence aside from publicly traded stock that the defendants controlled. These shell companies were created for the purpose of merging them with privately held companies in a process known as a reverse merger. Through the reverse mergers, the privately held companies became publicly traded without registering with the Commission. While such mergers are not illegal, stock held by insiders or affiliates after the merger generally cannot be resold absent registration.
http://www.sec.gov/litigation/litreleases/lr18546.htm
Securities and Exchange Commission v. Capital Acquisitions, Inc, et al., Civil Action No. 2:97-0977B (D. Utah)
U.S. v. Clealon B. Mann, Criminal Action No. 2:02-0741TC (D. Utah)
Both cases alleged that Mann was primarily responsible for selling interests in the Capital Acquisitions program, and raised approximately $24 million from investors nationwide. It was further alleged that Mann represented to investors that the money would be used to finance acquisition of properties to produce oil and gas, but was instead used to make interest payments to earlier investors and to finance other ventures that Mann or co-defendant Peter J. Buffo controlled.
http://triangle.bizjournals.com/triangle/stories/1998/03/16/daily3.html
SEC suspended trading in IHI's stock for a period of 10 business days, one day after a reverse merger placed it on the over-the-counter markets. The SEC alleges that International Heritage is operating a pyramid scheme, and has sold more than $150 million in unregistered securities over its three-year history. The SEC is asking for the reimbursement of all such funds and the levying of unspecified civil fines against founders.
Exchanges
NASDAQ
The Nasdaq debuted in 1971 as the world's first electronic market. Today it lists companies across the spectrum, including technology, retail, communications, financial services, media and biotechnology. Its competitive electronic market structure provides an efficient and low cost marketplace, while a high level of regulation protects investors and fosters an equitable and competitive market.
AMEX
The American Stock Exchange, one of 2 major national stock exchanges, is the nation's most diversified financial marketplace spanning every industry sector and market size. A self-regulating organization registered with the Securities and Exchange Commission, it is an auction market, with prices being determined by bids to buy and offers to sell. Stocks, options, exchange traded funds and structured products are available.
OTCBB
Over-the-counter Bulletin Board is a de-centralized market (as opposed to an exchange), for securities not listed on a stock or bond exchange. Trading occurs via telephone and computer, linking geographically dispersed dealers.
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