Wednesday, June 8, 2011

SEC Press Release: Microcap Stock Fraud

SEC Suspends Trading in 17 Companies in Proactive Effort to Combat Microcap Stock Fraud

The Securities and Exchange Commission (SEC) issued a press release today announcing that it had
suspended trading in 17 microcap stocks because of questions about the adequacy and accuracy of publicly available information about the companies, which trade in the over-the-counter (OTC) market.
The Order of Suspension of trading can be found here.

SEC’s regional offices, Office of Market Intelligences, and Microcap Fraud Working Group collaborated together when making the suspensions. The purpose of the suspensions is to protect the investing public from losses resulting from fraudulent activities of insiders and promoters.

Microcap stocks are stocks of public companies with low capitalization. They often trade in low volumes and the price volatility is usually very high. Because of its low price, low trade volume and high volatility, fraud in the trading and promotion of microcap stocks can happen in many different forms. The SEC describes a suspect example of Kore Nutrition Inc. A research report set a target price of $10.50 for Kore which caused the company’s stock to spike in August 31, 2010. This research report was company-paid. Furthermore, the company then announced “new distribution agreements to market its energy drinks” when no such agreement was stated in its quarterly report. Other forms of fraud involve the continued trading and external promotion of a company stock after the company has already announced its dissolution.

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