SEC Enforcement Updates


11/08/2006 – SEC Enforcement Update
SEC Enforcement Update
by Jeffrey Tew, Esq.The Wall Street Journal reports that the SEC brought 574 enforcement actions in fiscal 2006, down 8.9% from a year earlier and extending a three-year decline from a high in fiscal 2003.  The one category where enforcement actions went up was to deregister shares in companies that are late in filing periodic reports.  The decline is enforcement comes as the SEC’s budget has been flat for several years and its enforcement division staff fell 3.5% from a year earlier.  For several years investor complaints concerning unwanted emails and faxes have increased, for example up 83.79% in fiscal 2005.  Although the overall number of enforcement actions has declined, the SEC has continued to emphasize enforcement actions against promoters and officers of small cap companies.

(Jeffrey Tew is an attorney in Miami, Florida who specializes in defending SEC investigations and enforcement actions)

11/07/2006 – Pink Sheets to Categorize Stocks by Disclosure

November 7, 2006; Page C7
Wall Street Journal

NEW YORK — Stocks traded in the Pink Sheets market will be categorized on the electronic system, in an effort to further clarify the nature of the companies behind these thinly traded securities.

Special icons will even be displayed next to the stock symbol to help categorize the stocks. For example:

A yield sign will be displayed to mean “limited information available,” for companies with some financial information posted in the last six months, but which may not be current or complete.

A skull and crossbones icon will mean “public interest concern,” on stocks with unsolicited emailings, questionable promotion or other public-interest concerns.

Pink Sheets LLC is a closely held New York markets-information provider for the stocks of companies that typically fall short of size or other requirements for listing on exchanges such as the Nasdaq Stock Market or the American Stock Exchange.

The company said stocks will be divided into seven categories in all, ranging from those that have “substantial operating businesses and provide credible disclosure to the public,” to those that have “questionable promotion or other public-interest concerns.” About 20% of the companies listed on the Pink Sheets or OTC Bulletin Board could qualify for the top-tier listing.

“Our hope is that by providing a categorization, investors will be better warned in the companies that don’t disclose and better informed on the ones that do,” said R. Cromwell Coulson, chief executive of Pink Sheets.

“The quality of product that trades on the Pink Sheets is variable, and we need to do a better job of creating transparency and visibility.”

07/01/2006 – Disclosure of Compensation
Did you know that all promoters must not only disclose their current compensation, but any compensation that was paid for that promotion under past contracts, and any possibility of future compensation?  It’s true.
04/26/2006 – Pink Sheets Proposes Stock Promoter SEC Rule ChangeProposed rule targets explosion of misleading spam email and fax promotions on OTC stocks.Increased transparency and effective disclosure to protect investors from “pump and dump” promotion schemes.

New York, NY – April 26, 2006 – Pink Sheets, LLC today proposed that the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933 adopt rules mandating increased protections for investors against fraudulent activities by securities promoters and their sponsors. The proposed rule provides for full disclosure of the identity, compensation and relationships of all participants (i.e., issuers, sponsors, third party promoters, etc.) directly or indirectly engaged in the promotion of stocks in the over-the-counter (OTC) market. The rule also targets the flood of unsolicited spam emails and faxes promoting OTC securities to individual investors.

“We are requesting that the Commission take immediate action to expose securities promoters, spammers and their financiers whose actions are particularly detrimental to the livelihood of smaller public companies and to the confidence and financial well being of investors in OTC securities,” said Cromwell Coulson, President and CEO of Pink Sheets, LLC. “Effective disclosure and enhanced transparency in the marketplace will facilitate a healthier trading environment that will benefit both issuers and investors in the OTC marketplace.”

Under the principle that transparency is the most effective form of investor protection, Pink Sheets is advocating the following strategies to combat illegal promotion and unfair practices in the market for OTC securities:

  • Promotional materials must not just disclose that consideration was paid for the promotion but identify the promoters and their sponsors accurately, as well as provide current contact information for those entities.
  • Adequate current information regarding the issuer must be publicly available at the time the promotion takes place.
  • All securities held by promoters and their sponsors at the time the promotion takes place is restricted and cannot be sold without registration or an appropriate exemption.
  • Stock promoters must provide issuers of the stock that is being promoted with a copy of all promotional materials.
  • Promoters, their sponsors and issuers must inform transfer agents and broker-dealers that stock that is held by or on behalf of promoters and their sponsors is restricted.

“We believe that putting these straightforward requirements in place will enable investors to easily identify fraudulent stock promotions and unveil the miscreants who engineer them. Any company that does not have current information available has no business promoting its securities, since investors cannot make reasonable investment decisions in an information vacuum. By cutting off the ability of promoters, sponsors and affiliated parties to dump these stocks into the market, the rule will render fraudulent promotions unprofitable and set the stage for legitimate small company issuers to deliver information to the marketplace,” said Coulson.

The rule also targets the torrent of unsolicited and often illegal fax and email spam on obscure OTC securities. Spam-oriented securities promoters may be paid by issuers or affiliates of the issuer, or increasingly third parties that may or may not be affiliates of the issuer. In most cases, these securities promoters and those who finance them hope to turn a quick profit when unsuspecting investors buy stocks based on unsupported or spurious claims – leading the stock’s market value to plummet as soon as these promotional activities cease.

“There is hardly a household in America that has not been inundated with spam emails making fantastic claims about easy profits to be made by any purchaser of some obscure stock – with many schemes being launched without the consent or even knowledge of the issuer. Given that the OTC markets play an essential role in the capital formation of smaller companies and provide a portal for overseas issuers seeking to access the American capital markets, the Pink Sheets is committed to working with regulators to create a more orderly and legitimate marketplace for all participants,” Coulson concluded.

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