By Patricia Uceda, Spring 2015 Graduate Research Assistant
Dormant shell companies are often used to implement investment fraud schemes such as pump-and-dump schemes. They are prime targets because of their low share price and low visibility, making them highly susceptible to market manipulation.
Recently the SEC suspended trading in 128 inactive penny stock companies as a preventive measure to ensure that they don’t become a source for pump-and-dump schemes. The dormant shell companies were located in 24 states and Canada. These suspensions are the latest in the SEC’s microcap fraud fighting initiative. Microcap fraud is essentially fraud involving penny stock companies, or companies with low (“micro”) capitalizations.
Operation Shell-Expel, the SEC’s microcap fraud fighting initiative, is an aggressive plan to clean out dormant stocks in shell companies that may be targeted by fraudsters. It was started in 2012 and is intended to stop fraud before it begins, hopefully saving investors from being victims of investment scams. The SEC Enforcement Division’s Office of Market Intelligence uses computers and data mining to scour the marketplace and identify dormant companies ripe for abuse.
Since it began, Operation Shell-Expel has resulted in trading suspensions of more than 800 microcap stocks, or 8% of the market. If an inactive company is suspended, its stock cannot be relisted unless they provide updated financial information to prove they are actually operational. If they do not, the dormant shell company remains suspended and is rendered worthless to any investment scam artists.