On June 3, 2013, the Securities and Exchange Commission ("SEC") announced the second-largest trading suspension in its history as part of its "Operation Shell Expel." As reported in the BrokeAndBroker.com Blog "SEC Suspends Trading in 61 Empty Shells With Delinquent Filings," the SEC had suspended trading in the securities of 61 empty shell companies that were delinquent in their public filings and seemingly no longer in business. The SEC's action likely protected investors from "pump and dump" fraudsters who populate the pennystock landscape.
On October 30, 2014, the SEC posted an "Investor Alert" warning about the promotion of dormant shell companies by pennystock scamsters. BrokeAndBroker.com Blog offers this full-text SEC "Investor Alert" to its readers. Available at
Investor Alert: Dormant Shell Companies – How to Protect Your Portfolio from Fraud
FINRA and the SEC’s Office of Investor Education and Advocacy are issuing this alert to warn investors that some low-priced “penny” stocks that are aggressively promoted may in fact be stocks of dormant shell companies – companies that have no or nominal business operations or non-cash assets for an extended period of time. Many dormant shell companies that continue to trade in the over-the-counter (OTC) market are susceptible to market manipulation. This alert follows action by the SEC to suspend trading in 255 dormant shell companies in February 2014 and subsequent suspensions of other thinly traded penny stocks.
Rise and Fall of the Dormant Shell Company
FINRA and the SEC continue to be concerned about pump-and-dump schemes in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to pump up the stock’s price. The fraudster then dumps his shares, causing the price to fall, leaving investors with worthless or nearly worthless shares of stock. A shell company is often used in these types of scams. These dormant shell companies may be on the brink of insolvency or even bankrupt. These companies also may not file periodic reports with the SEC that would provide public information about their business and financial condition and may no longer be in good standing in their state of incorporation. Dormant shell companies often have no officers or management. As the name implies, these companies are simply shells.
Fraudsters have been known to use dormant shell companies in pump-and-dump schemes. For example, fraudsters may buy shares in the shell company and then claim that the company has developed a “hot” new product. In some cases, the company will also announce that it has new management or corporate officers. The company may also be re-incorporated, possibly under a new name. These actions may also coincide with a reverse stock split that increases the company’s share price.
These actions often cause public communication about the once-dormant company to increase. Press releases, promotional campaigns, social media and penny stock chat rooms begin to tout the stock. (Typically, regulatory filings remain dormant.) The stock gets “pumped” back to life. Trading becomes more active, and the stock price can soar.
Unfortunately, investors drawn in by these promotional campaigns often find themselves on the receiving end of the “dump.” Fraudsters cash out by selling their shares at higher prices and reaping significant profits, while tanking the stock price and leaving investors with worthless or nearly worthless stock.
These tips can help you walk away from manipulation schemes involving stocks of dormant shell companies:
Research whether the company has been dormant—and brought back to life. You can search the company name or trading symbol in the SEC's EDGAR database to see when the company may have last filed periodic reports. Another resource is the Secretary of State’s office in the state where the company was formed or incorporated. The charter documents filed with the state may provide details of the company’s history. See if the company recently reinstated business operations in its original state of incorporation, or re-incorporated in a new state. If possible, contact company management to determine why it ceased operations to begin with, and why it decided to reinstate operations. Internet searches may also turn up information on the company or its management, such as information about key officers and directors of the company.
Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc. Companies that list their stocks on exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on OTC Link generally do not have to meet any minimum standards (although companies quoted on the OTC Link’s OTCQX and OTCQB marketplaces are subject to some initial and ongoing requirements).
Be wary of frequent changes to a company's name or business focus. Name changes and the potential for manipulation often go hand in hand. You can learn about name changes and other corporate events on the OTC Markets website. If the company files periodic reports, you can search changes in a company name or business focus in the SEC's EDGAR database. Internet searches may also turn up this information.
Check for mammoth reverse stock splits. A reverse stock split reduces the number of shares outstanding and increases the price per share without changing the total economic value of the shares. A company might perform a reverse stock split with a 1-for-5 or similar ratio (in an effort to meet minimum bid price requirements for continued listing on an exchange). A dormant shell company, on the other hand, might carry out a 1-for-20,000 or even 1-for-50,000 reverse split. This may be done to inflate the price of the stock. Check for reverse splits on the OTC Markets website.
Know that "Q" is for caution. A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy. Like other non-reporting shell companies, dormant, bankrupt companies can be candidates for manipulation.
If a Problem Occurs
If you believe you've been defrauded or treated unfairly by a securities professional or firm, file a complaint. If you suspect that someone you know has been taken in by a scam, send a tip.
To receive the latest Investor Alerts and Bulletins from the SEC’s Office of Investor Education and Advocacy, sign up for our RSS feed here or for email here. You can also follow us on Twitter @SEC_Investor_Ed, or visit Investor.gov, the SEC’s website dedicated to individual investors.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
For one reason or another, stockbrokers may not want to maintain their personal accounts at their employer's brokerage firm. Some of the reasons often have to do with confidentiality and preventing an employer from freezing an account should an employment dispute arise. Other reasons frequently involve attempts to hide prohibited transactions from the inquiring eyes of an employer's compliance department. Consider this regulatory settlement involving one stockbroker's "away" accounts.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Abhishek Ghuwalewala submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Abhishek Ghuwalewala, Respondent (AWC #2013036256501, October 20, 2014).
In 2010, Ghuwalewala entered the securities industry with FINRA member firm Stifel, Nicolaus & Company, Inc., where he remained until March 2013. The AWC asserts that he had no prior formal disciplinary history.
The AWC alleges that in October 2010, when Ghuwalewala began his employment at Stifel, he notified his employer and obtained the firm’s approval to maintain an individual brokerage account in his name at another broker-dealer ("Away1").
NASD CONDUCT RULE 3050. Transactions for or by Associated Persons
(a) Determine Adverse Interest
A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.
(b) Obligations of Executing Member
Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member's intention to provide the notice and information required by subparagraphs (1) and (2).
(c) Obligations of Associated Persons Concerning an Account with a Member
A person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member; provided, however, that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated.
(d) Obligations of Associated Persons Concerning an Account with a Notice-Registered Broker/Dealer, Investment Adviser, Bank, or Other Financial Institution
A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a broker/dealer that is registered pursuant to Section 15(b)(11) of the Act ("notice-registered broker/dealer"), a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transactions, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the notice-registered broker/dealer, investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this paragraph (d) was established prior to a person's association
with a member, the person shall comply with this paragraph promptly after becoming so associated.
(e) Paragraphs (c) and (d) shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
(f) Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
The provisions of this Rule shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.
Around August 10, 2012 (about two years after getting permission to maintain Away1), Ghuwalewala allegedly opened a second “away” brokerage account at the other broker-dealer ("Away2"). In submitting the new account forms to the other broker-dealer, Ghuwalewala did not disclose that his “current employer” was Stifel but provided the name of his "previous employer." Moreover, in response to a question inquiring whether he was currently employed by a “broker/dealer,” he answered “No.” The AWC asserts that he did not notify and did not obtain approval from Stifel concerning the maintenance of Away2.
SIDE BAR: Although not indicated in the AWC, it appears that the "current employer" disclosed on the Away2 new account forms by Ghuwalewala was not a broker-dealer but a "previous employer." According to online FINRA records as of October 31, 2014, Ghuwalewala had been employed by from 2008 to 2010 by the Kellogg School of Management and from 2001 to 2008 by National Instruments.
More puzzling, the AWC fails to explain whether Ghuwalewala had notified the other broker-dealer where he maintained Away1 that he was employed at Stifel as of 2010. Since the AWC asserts that Ghuwalewala had been given permission by Stifel to maintain Away1, Rule 3050 imposes an obligation upon the registered person to notify the executing brokerage firm of his industry status. All of which prompts the question as to whether the other broker-dealer had a disclosure on its books and records that Ghuwalewala was registered with Stifel; and why that circumstance did (or didn't) set off compliance alarms when he opened Away2 but denied being registered with Stifel.
Around August 14, 2012, Ghuwalewala requested permission from Stifel to open what his employer would have understood was a second “away” brokerage account at the other broker-dealer (in fact, this would have been the third) ("Away3"). On the same day that he sought Stifel’s permission to maintain Away3, Ghuwalewala submitted the new account application to the other broker-dealer, notwithstanding that his employer had not responded to his request for permission. It is not specified whether he did or didn't disclose his current employer as Stifel on the account documentation.
Pursuant to a newly enacted policy, on August 14, 2012, Stifel instructed Ghuwalewala to close or transfer the proposed “away” account to Stifel. Contrary to those instructions, on August 15, 2012, Away3 was opened at the other broker-dealer and Ghuwalewala did not close or transfer the account to Stifel.
SIDE BAR: You got all of that? Really?? Okay, by way of recap, Ghuwalewala apparently did everything by the book with the October 2010 Away1. Comes August 10, 2012, however, he opens Away2 without following the rules and then makes material misstatements that conceal his industry employment. Then, in August 2012, he goes ahead and opens Away3 but apparently goes through the motions of asking permission from Stifel, notwithstanding that he didn't wait for his employer's authorization, which was not forthcoming.
A Slow Moving Experience
For reasons not explained in the AWC, Stifel contacted the other broker-dealer around September 2012, and was informed by the other firm that Ghuwalewala had opened two new accounts ("new" in the sense that Stifel apparently only knew about Away 1 but not Away2 and Away3). The AWC alleges that for “several months, Stifel attempted unsuccessfully to have Ghuwalewala move the accounts from B-D to Stifel, pursuant to Stifel’s policy prohibiting employees from holding outside brokerage accounts.”
SIDE BAR: The AWC loses me here. Stifel was aware that Ghuwalewala had asked and was approved to maintain Away1 in October 2010. Apparently, in September 2012, Stifel not only learns that Ghuwalewala had opened Away2 but apparently also learns, for the first time, about Away3, which was never disclosed to the firm. Stifel's response to those revelations was to spend “months” attempting to convince its non-compliant employee to transfer the two subject accounts (assuming that he was permitted to retain the first “away” account at the other firm)?
Did FINRA have any issue with Stifel's response? In the AWC, Stifel's conduct comes off as lackadaisical and inexplicable. Is that the false impression fostered by an inarticulate AWC or, in fact, is that what FINRA intended to imply? Simply put, why didn't Stifel terminate Ghuwalewala upon learning that he had opened two "away" accounts in contravention of the firm's policies?
If nothing else but consistent, in February 2013, Ghuwalewala opened a fourth “away” account at the other broker-dealer ("Away4"). As of this date, he had still not complied with Stifel's requests to transfer the previously opened and unauthorized accounts. Further, he had purportedly submitted the new account forms to the other firm with the non-disclosure of his “current” employment by Stifel and listed a previous employer.
SIDE BAR: Ummm . . . I’m lost here. I thought that in September there was a dialog between Stifel and the other broker-dealer. Didn’t that other firm realize that Ghuwalewala was not answering the question honestly? How the hell did that "away" account get opened by the other broker-dealer in February 2013? Did FINRA have an issue with that?
This (A)Way Out
According to online FINRA records as of October 31, 2014, Stifel “Discharged” Ghuwalewala on March 5, 2013 based upon allegations that he was in:
VIOLATION OF COMPANY POLICY AND FINRA RULES REGARDING OUTSIDE SECURITIES ACCOUNTS
FINRA deemed Ghuwalewala’s conduct in violation of NASD Rule 3050 and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed a $5,000 fine upon Ghuwalewala and a two-month suspension from association with any FINRA-registered firm in all capacities.
For those of you who need some music to ponder this mess, I give you a choice of "Not Fade Away" by Buddy Holly and the Rolling Stones. Oh, but, seriously, make sure to scroll down below the Stones video for my brilliant insights and pithy comments about this case. You wouldn't want to miss my amazing musings, would you?:
Bill Singer's Comment
I'm sorry but this AWC strikes me as garbage because it is a mess of implications and inferences that leave far too much to the reader's imagination in terms of filling in important compliance and regulatory blanks.
Starting in August 2012 and running through February 2013, Ghuwalewala opens Away2, Away3, and Away4 without Stifel's authorization and fails to disclose his employment with Stifel on the other firm's new account forms. Upon learning these facts, he not only fails to timely repatriate the accounts to Stifel, but the employer inexplicably takes "months" trying to accomplish that goal. Oddly, the AWC fails to indicate whether Away1, Away2, and/or Away3 were ever transferred to Stifel.
The AWC is unclear whether the other firm was notified in October 2010 or thereabouts by Ghuwalewala that he was registered with Stifel. The AWC asserts that he had asked for and had received permission to maintain Away1 by his industry employer, but there is no indication as to whether the other firm was duly notified of the Rule 3050 disclosure items. As such, we can't understand whether the other firm was duped by Ghuwalewala or had some complicity. Of course, FINRA has conveniently protected that other firm by not disclosing its identity -- which may be appropriate if that firm was victimized. We do know that by September 2012, Stifel had contacted the other firm about the subject away accounts; but, notwithstanding, the other firm opened Away3 and Away4.
What, if anything, did FINRA do in terms of the unnamed brokerage firm's apparent complicity with at least opening Away4? What, if anything, did FINRA do in terms of Stifel's less-than-aggressive compliance effort following its learning about its employee's repeat violations of its policies? No answers to those questions are provided in the AWC. If, in fact, both brokerage firms were victimized by Ghuwalewala and their compliance efforts stand muster, then the AWC does a disservice to those members.
Either this AWC has taken dramatic liberties with the facts in an effort to make a relatively minor case look far more dire than it is; or, the fact pattern is accurate and FINRA has given this Respondent an early Christmas gift. How Ghuwalewala was only sanctioned with a relatively modest fine and an inexplicable two-month suspension is something that I cannot reconcile with the AWC. Oh my, I guess that I'll just fade away . . .
As with virtually every job, the practice of law often becomes mind-numbingly boring. Every so often, however, the profession presents you with a fascinating puzzle. A recent federal case may strike some as a religious question raising basic issues of moral right and wrong -- a question of "sin," if you will. For others, these same set of facts do not present any issue of morality but a complex and complicated question of law and its interpretation. Consider the New York State Domestic Relations Law:
Section 5: A marriage is incestuous and void whether the relatives are legitimate or illegitimate between either:
1. An ancestor and a descendant;
2. A brother and sister of either the whole or the half blood;
3. An uncle and niece or an aunt or nephew.
If a marriage prohibited by the foregoing provisions of this section be solemnized it shall be void, and the parties thereto shall each be fined not less than fifty nor more than one hundred dollars and may, in the discretion of the court in addition to said fine, be imprisoned for a term not exceeding six months. Any person who shall knowingly and wilfully solemnize such marriage, or procure or aid in the solemnization of the same, shall be deemed guilty of a misdemeanor and shall be fined or imprisoned in like manner.
Keeping in mind the incest proscriptions of Section 5, factor in the following:
A Conditional Permanent Resident
Huyen Nguyen, a citizen of Vietnam, was granted conditional permanent resident status in the United States of America in 2000. In January of 2000, in Rochester, NY, Nguyen, then 19, married naturalized American citizen Vu Trong, 24.
The Wife's Grandmother Was Her Husband's Mother
Funny thing about husband Trong and wife Nguyen. In 1950, Nguyen's grandmother Nguyen Thi Ba, gave birth to Nguyen's mother. In 1975, grandmother Ba gave birth to Nguyen's husband Trong but by a different father than that of Nguyen's mother.
Yeah, go ahead, ponder that!
As a result of Ba’s parenting, Nguyen’s mother was Trong’s half-sister, and Nguyen winds up as her husband’s half-niece and he her half-uncle.
Under NY Domestic Relations Law Section, Section 5(2) says "half" brothers and sisters can't marry and under 5(3) uncles and nieces can't marry. So . . . what about a marriage between a half-niece and her half-uncle?
Immigration Steps In
Remember that part where Nguyen became a conditional legal resident of the US by marriage? On July 10, 2002, Nguyen and her husband filed a joint petition to remove the conditions but on December 12, 2007, the United States Customs and Immigration Service denied the petition after finding that Nguyen was Truong’s half‐niece. That familial relationship apparently was deemed incestuous and voided the marriage; and, accordingly, an immigration judge ordered Nguyen's removed from the country. On appeal, the Board of Immigration Appeals affirmed the removal order.
How Do You See It?
Nguyen petitioned the United States Court of Appeals for the Second Circuit, which submitted the following question of for certification to the New York State Court of Appeals:
"Does section 5 (3) of New York's Domestic Relations Law void as incestuous a marriage between an uncle and niece 'of the half blood' (that is, where the husband is the half-brother of the wife's mother)?"
In finding that the marriage between a half-uncle and half-niece was not void as incestuous under section 5(3), the NY Court of Appeals offered the following rationale in a concurring opinion:
I also conclude that the apparent purpose of section 5 (3) supports a reading that excludes half-uncle/half-niece marriages from its scope. Section 5 as a whole may be thought of as serving two purposes: it reflects long-held and deeply-rooted values, and it is also concerned with preventing genetic diseases and defects. Sections 5 (1) and 5 (2), prohibiting primarily parent-child and brother-sister marriages, are grounded in the almost universal horror with which such marriages are viewed – a horror perhaps attributable to the destructive effect on normal family life that would follow if people viewed their parents, children, brothers and sisters as potential sexual partners. As the Appellate Division explained in Matter of May (280 App Div 647, 649 [3d Dept 1952], aff'd 305 NY 486 ), these relationships are "so incestuous in degree as to have been regarded with abhorrence since time immemorial."
Pages 5-6 of the Opinion
The Opinion further explains:
The second purpose of section 5's prohibition of incest is to prevent the increased risk of genetic disorders generally believed to result from "inbreeding." (It may be no coincidence that the broadening of the incest statute in 1893 was roughly contemporaneous with the development of the modern science of genetics in the late 19th century.) We are not geneticists, and the record and the briefs in this case do not contain any scientific analysis; but neither party disputes the intuitively correct-seeming conclusion that the genetic risk in a half-uncle, half-niece relationship is half what it would be if the parties were related by the full blood. Indeed, both parties acknowledged at oral argument that the risk in a half-uncle/half-niece marriage is comparable to the risk in a marriage of first cousins. First cousins are allowed to marry in New York, and I conclude that it was not the Legislature's purpose to avert the similar, relatively small, genetic risk inherent in relationships like this one.
On June 3, 2013, the Securities and Exchange Commission ("SEC") announced the second-largest trading suspension in its history as part of its "Operation Shell Expel." As reported in the BrokeAndBroker.com Blog "SEC Suspends Trading in 61 Empty Shells With Delinquent Filings," the SEC had suspended trading in the securities of 61 empty shell co... Read On