Scorboard
Revisited
Scorboard
Revisited
by William Cate
Investor Alert
My
May 1998 SCORBOARD article in the Bull & Bear suggested that
the National Association of Securities Dealers (NASD) illegally trades "Exempt
Securities" (Microcap stocks) on the Over-the-Counter Bulletin Board
(OTCBB). Market Maker short selling of these Microcap stocks ensured that
public investors consistently lost their money.
In
July, the NASD Board voted to delist approximately 3,400 Microcap companies
from the OTCBB. The NASD decision is File Number: SR-NASD-98-512 6530/6540.
This NASD Board decision is subject to review by the SEC. After the SEC
review, the Microcaps are expected to have six months to become reporting
companies or be delisted.
The
SEC regulates the NASD. The SEC is responsible for the public trading of
shares in the United States. Based upon recent SEC Cease & Desist orders
against Internet Stock Exchanges, I believe that the OTCBB Microcap trading
violates Section 5 of the 1933 Act. The SEC response to the NASD Microcap
Resolution should have been clear. Delist the "Exempt Securities."
Your brokers violated the Law by trading in these shares. They must refund
money to clients who lost from "Exempt Securities" trades on the
OTCBB.
The
SEC sees the "Exempt Securities" issue in a different light. They've
reversed their position on Microcap regulation. For years, the SEC held
that their mandate didn't include the regulation of "Exempt Securities."
Today, the SEC goal appears to be to hold the Microcap companies responsible
for illegally promoting their stock on the OTCBB. This is an example of
a battleship sinking rowboats.
September,
the SEC began asking some Microcap OTCBB companies about their stock promotion
efforts. The companies can't answer this question without conceding that
they violated Sec 5 of the 1933 Act. It appears that the SEC is lining up
Christians to throw them to the lions. The Microcap OTCBB delisting will
cost public investors several billion dollars. By charging some Microcaps
with fraud, the SEC will direct public outrage against the Microcap companies
and not against the Establishment.
In
October, the SEC announced filing charges against 44 Internet stock promotion
firms. These firms primarily hyped Microcap stocks trading the OTCBB. The
SEC action hasn't reduced the Net hype. It'll move it offshore. It does
give the SEC their cover story. The public lost money because dishonest
Microcap companies used crooked promoters to hype their stock. As with any
good cover story, it may be true in some cases. But, it doesn't address
the NASD Microcap listing policy, the short selling problem, nor the failure
of the SEC to protect the public until the press raised the Exempt Security
issue.
If
you're an investor don't buy OTCBB Microcap stocks. You're certain to lose
your money. The NASD doesn't identify these companies, so rely on your stock
broker or the SEC's EDGAR database to protect your bank account.
If
you bought OTCBB Microcap stocks, don't join the growing trend of suing
the Microcap company. You'll get nothing but a bill for legal services.
Upon your attorney's advice, rely on Section 5 of the 1933 Act and seek
compensation from the NASD.
If
you're an OTCBB Microcap company, develop your delisting response strategy
before the NASD acts. You have three choices.
1.
You can do nothing. In 1999, your Microcap company's stock will be delisted
from the OTCBB. If your shareholders don't complain to the SEC nor file
a lawsuit, you've solved your problem. If any shareholder files an SEC complaint
or sues, you could spend several hundred thousand dollars on legal fees.
You'll have to explain your stock promotion and justify your decision to
allow the NASD to delist your company. Filing for bankruptcy won't relieve
you of replying to an SEC investigation.
2.
You could list your company's stock on another exchange. There's at least
one foreign stock exchange apparently considering taking the Microcap listings.
3.
Your company could become a reporting company." If this is your decision,
act now, not when you get your OTCBB letter. The delisting letters may create
a rush to file with the SEC.
You
have a choice of SEC filing strategies, I advise my clients to file so that
the company gets a financing and can list on a European Stock Exchange.
It's the simplest, fastest, and cheapest alternative.
In
1933, the goal of Congress was to create a Securities and Exchange Commission
that would protect the public from stock fraud while enhancing capital formation
for business. If Congress's goal was only to protect the public, they would
have outlawed stock markets.
The
SEC doesn't know how to achieve its Congressional mandate. Money Magazine
(1/1/98) points out that stock fraud grew by 300% in the past decade. This
threefold increase in stock fraud occurred after the SEC persuaded Congress
to pass the Penny Stock Act. Since 1933, stock fraud has grown by over one
hundred-fold. Recently, the SEC appeared to believe that they could save
the public by outlawing the OTC Market. The successful opposition to this
proposal was lead by National Quotes. They publish the Pink Sheets. Meanwhile,
the SEC drives away honest entrepreneurs from becoming reporting companies
by making the filing process too costly.
Politicians
react to the SEC's destruction of capital markets by enacting laws that
encourage businesses to seek equity investment beyond SEC control. SCOR
is an example. The problem is the crooks find a way to use the Government's
desire to allow capital formation as a springboard for stock fraud. The
OTCBB Microcap Scandal is the result. This regulatory failure has been cyclic
for sixty years. After the Microcap Scandal, there will be Government pressure
to encourage business capital formation. The next stock fraud cycle will
follow.
The
SEC can balance the need for capital formation against the necessity to
protect the public investor. Since the OTC Market exists, it should be used
to solve their dilemma. The secret is to make it unprofitable for the crooks
to take companies public or manipulate the Market.
NASD
members must stop selling stocks short. A brokerage firm with a short position
forty-times its assets isn't protecting the public investors. It's fleecing
them. Stock brokers must be on the same side of trades as their public clients.
The primary reason that the OTCBB listed the Microcaps was that they are
an easy short selling target. Recently, the Hong Kong Government removed
stock brokers as short sellers in their Market. Their Stock Index rose 25%
in one week. The Chinese Government intends to pass a Law to ensure that
professional short selling ends in Hong Kong.
Delaying
the sale of insider stock for a year doesn't work. It's traded offshore
in Europe and the Caribbean at a 70% discount. It hits the American Market
like a tidal wave in 366 days. It takes five years for a startup company
to succeed. The insider stock shouldn't be issued as share certificates,
until the company shows an audited profit. It should enter the Market as
a fixed formula of shares issued against the company's pretax profit. This
policy would force the insiders to make the company succeed, before they
dump stock on the public.
Public
companies must raise money to grow. Regulatory costs make it uneconomic
to do a public secondary financing. Management responds by doing a 60% discounted
Regulation S offering in Europe. This Reg. S stock hits the American Market
a year later. The company's public shareholders lose their investment. The
share price collapse often leads to the company's failure. The SEC should
require that public companies sell their Treasury stock at a share price
higher than the company's current trading price. The Treasury stock should
be sold without trading restrictions. The higher-price share policy would
reduce stock dilution and ensure against dumping in the OTC Market. The
European Reg. S Market would become an American Warrant Market.
Clear
language, reduced filing forms, and electronic filings are positive small
steps in the right direction. However, the SEC must review its regulatory
strategy if it expects to fulfill its Congressional mandate. The SEC has
missed the mark for sixty years. How long should American taxpayers be asked
to pay $3 billion a year for SEC failure?
Editor's
Note: Mr. William Cate has been
a stock industry consultant for 17 years. He publishes Investor Alert and
manages Beowulf Investments. You can contact him at P.O. Box 276, Pescadero,
CA 94060, Tel: (650) 879-0654, email: money@southcoast.net
|| TABLE OF CONTENTS || Bull & Bear Newsletter Digest || Bull &
Bear Reporter Featured Companies || Monetary Digest |
| The Bull & Bear Financial Report Copyright 1999 | All Rights Reserved Reproduction in whole or part is strictly prohibited without prior written permision NOTE: The Bull & Bear Financial Report does not itself endorse or guarantee the accuracy or reliability of information, statements or opinionsexpressed by any individuals or organizations posted on this site PLEASE READ DISCLAIMER |
Web Site Designed & Maintained by Estrada Design & Communications in association with THE BULL & BEAR INTERNET DIVISION |