SEC ups efforts to combat manipulations of ‘microcap’ stocks; “The problem with policing fraudulent microcaps is that they are like mushrooms. They keep popping up no matter how many you shut down.”

SEC ups efforts to combat manipulations of ‘microcap’ stocks

By Dina ElBoghdady, Friday, November 29, 5:49 AM

The Securities and Exchange Commission is redoubling its effort to combat the manipulation of “microcap” stocks, opening about half a dozen investigations each month into schemes suspected of bilking mom-and-pop investors, agency officials said. As the SEC describes it, the term microcaps typically refers to the low-priced shares offered by the smallest of public companies, the ones that do not qualify to be listed on the large national exchanges, often because their stock is too thinly traded or too cheap.Instead, microcaps are bought and sold in the less regulated “over-the-counter” market, sometimes for less than a penny per share, without much information for investors to examine. All these factors make microcaps more susceptible to fraud, which is why the SEC is intensifying its enforcement efforts in that arena.

With a new chairman at its helm, and new chiefs leading the enforcement division, the agency created a 26-person task force in July devoted to rooting out microcap trading abuses. Since then, the agency has opened five or six microcap investigations a month, well above the previous year’s pace, agency officials said. The initiative builds on the efforts of a loosely-knit SEC working group created three years ago.

“For years, we did a number of these cases, but we didn’t attack it with a systematic approach,” said Andrew Ceresney, co-director of the SEC’s enforcement division. “We now have people focused on the area full-time for the first time, and by marshalling their expertise, we think we can make a difference.”

The classic microcap scams involve efforts to hype the value of a company’s stock by spreading false or misleading information via spam, online chat groups or even paid promoters. In July, the SEC accused two such promoters, Cort Poyner and Mohammad Dolah, of paying kickbacks to individuals who agreed to sell and purchase shares in two microcap firms, thereby boosting the firms’ stock volume and prices.

This type of illegal activity, if left unchecked, can lead to “pump and dump” schemes that profit company insiders or others who take part in the fraud, and hurt unsuspecting retail investors. As soon as the price moves up, these insiders dump the shares they bought on the cheap and walk off with the difference.

Attorneys representing Dolah and Poyner declined to comment.

The fraud can take shape in many forms, including arrangements that allow the stock’s issuers to say they’re raising money for one purpose when they actually intend to use it for another. In August, for instance, the SEC accused the chief executive of a Florida software company of hiring “boiler rooms” in Europe to raise money for his firm.

Through this scheme, John G. Rizzo attracted $2.5 million from 120 investors in Britain, the SEC said. He then allegedly used the money to pay commissions to the boiler room workers, and cover his personal expenses.

Rizzo’s attorney, Steven Goldsobel, could not be reached for comment.

This week the agency continued its push when it charged Curt Kramer and his firms with buying billions of shares in two microcap firms and then failing to register them before reselling them to investors. Kramer, who did not admit wrongdoing, agreed to pay $1.4 million to cover the illicit profits he made as well as penalties.

The arrangement between Kramer and one of the companies allegedly enabled him to buy shares of that company at fire sale prices when the company was in need of money for its operations. Kramer would then unload the shares for profit, the SEC said.

The agency said that going forward it will focus on repeat offenders, who account for a substantial amount of the fraud. It also is aggressively moving to suspend trading when it has reason to suspect misconduct. The agency has issued 90 trading suspensions so far this year, up 35 percent from the same period a year earlier. Most of the suspensions involved microcaps.

But making a dent in this corner of the market will be challenging, legal experts said.

“The problem with policing fraudulent microcaps is that they are like mushrooms,” said Adam C. Pritchard, a professor at the University of Michigan Law School. “They keep popping up no matter how many you shut down.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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