Microcaps Roundtable "NOTES & Hilites
Roundtable on the Execution, Clearance and Settlement of Microcap Securities
U.S. Securities and Exchange Commission
100 F Street N.E. Washington, DC
Station Place I Multipurpose Room October 17, 2011
1:00 p.m. Call to Order and Opening Remarks: Chairman Mary Schapiro and Robert Khuzami, Director of the Division of Enforcement Panel 1 — Compliance Challenges Associated with Microcap Securities
Moderator: Peter Curley, Associate Director, Division of Trading and Markets.
Claire Santaniello — Managing Director and Chief Compliance Officer, Pershing
Mihal Nahari — Chief Compliance Officer, The Depository Trust & Clearing Corporation (“DTCC”)
Thomas Merritt — Senior Managing Director, Deputy General Counsel and Corporate Secretary, Knight Capital Group
Steven Nelson — Chairman, Continental Stock Transfer and Trust Company
Marvin Pickholz — Partner, Duane Morris
Brian Lebrecht — Founder, The Lebrecht Group, APLC
David Chapman — Director, Department of Market Regulation, FINRA Panel 2 — Anti-Money Laundering Monitoring
Moderator: Sarah Green, Bank Secrecy Act Specialist for the Office of Market Intelligence
Betty Santangelo — Partner, Schulte Roth & Zabel
Susan DeSantis — Managing Director and Deputy Chief Compliance Officer, DTCC
Lynne Johnston — US Head of Anti-Money Laundering Compliance, RBC Capital Markets
Harold Crawford — Global Director of Anti-Money Laundering & Sanctions, Brown Brothers Harriman & Co.
Aaron Fox — Managing Director, IPSA International Inc.
Jeff Horowitz — Managing Director and Chief Anti-Money Laundering and OFAC Officer, Pershing
Bill Park — Director, FINRA Department of Enforcement Panel 3: Potential Changes to the Regulatory Framework Concerning Microcap Securities
Moderator: John Polise, Associate Director, Office of Compliance, Inspections and Examinations.
David Feldman — Partner, Richardson & Patel LLP
Susan Merrill — Partner, Bingham McCutchen
Chris Stone— Vice President of Equity Products, FINRA
Susan Grafton — Of Counsel, Gibson, Dunn & Crutcher
Walter Van Dorn — Partner, SNR Denton US LLP
R. Cromwell Coulson — President, Chief Executive Officer and Director, OTC Markets Group
NOTES and Hilites
All panelists agreed that there needs to be communication and transparency between the agencies to be proactive in routing out pump and dump schemes, the selling of unregistered or questionably registered securities, and microcap fraud.
The Gatekeepers of the DTCC have taken affirmative steps to CHILL many stocks that have suspicious trading activities of allegedly unregistered securities or improperly exempted from registration securities. The DTCC does not have the authority to initiate questions to a Security so the DTCC chills a Security until the chilled Security contacts them and remediates the concerns. The DTCC does not advise any Security or the inquiring public on specific remedies or processes to remove a chill because the " bad actors " would quickly find loopholes and other deceptions to circumvent a DTCC Chill.
A panelist commented that due diligence is a " nonsense phrase " when the trustworthiness of the source is highly questionable, and Legal Opinions should be presumed to be worthless because too many lawyers predicate their Legal Opinions on the trustworthiness of the Issuer without conducting any vetting of the Issuer's information which is often false. It was recommended that the SEC impose strict reqirements on Lawyers who write Legal Opinions to thoroughly vet Transfer Agents and Issuers to ensure their Legal Opinions are accurate.
The DTCC have in place a Risk Assessment team to detect suspicious trading activities involving unregistered securities and questionably exempt from registration securities citing severe concerns about Legal Opinion Letters improperly exempting securities from registration. The DTCC raised concerns about Issuers " lawyer shopping " to find a lawyer who will do the Issuer's bidding without any vetting whatsoever and recommended mandatory rules for Lawyers to follow....or many more Issuers can expect DTCC CHILLS. At the onset of clearance and settlement issues the DTCC's Risk and Assessment can and are invoking CHILLS. Securities that originate onshore and then go offshore to avoid registration and to hide share originations are deceptive practices of offenders, particularly repeat offenders. The DTCC suggested that more SEC Suspensions would be even more effective than DTCC Chills once SARs have triggered.
Various panelists talked about red flags and the necessity for Gatekeepers ( eg Broker Dealers, Transfer Agents, Clearing Firms ) to file SARs ( Suspicious Activity Reports ) to the SEC and DTCC on all suspicious trading activities that invariably involve the selling of unregistered or questionably registered shares. The panel agreed that any microcap company that changes business operations should be cause for a SARs. SEC Chairman Schapiro said that one SARs may not be cause for a Suspension or an Inquiry but she exampled that 3 SARs from various Gatekeepers could. She (and other panelists ) state that SARs are accelerating from 578 reports in 2006 to over 1600 in 2011.
Knight Securities stated that Marker Makers have limited resources to discover information on any Issuer and suggested a collective, central base of information be available for all Gatekeepers to access.
The Division of Enforcement and Anti-Money Laundering ( AML ) expect to implement a central repository of information for all Gatekeepers to access. The objective is to identify ALL suspected and proven offenders and to stop repeat offenders who have been successful at starting up new enterprises after a previous enterprise has expired or been routed out as a fraud.
The Division wants ALL non-reporting Issuers to file timely financials and to conduct a yearly audit. The Division wants OTC stocks to file legal disclosures since company disclosures on websites and via news releases can be deceptive.
Panelists noted that an increasing number of Broker Dealers are refusing to allow trading on non-reporting Securities for all of the aforementioned reasons. Regulation Notice 0905 alerts B.D.'s that they may be wittingly or unwittingly selling unregistered Securities or improperly exempted from registration Securities of Issuers and family / friends of Issuers. Bottom line to B.D.'s is to vet all securities for sale.
Cromwell Coulson, CEO of the OTC Group plauded the tier system for being an excellent resource for the SEC to investigate SARs, conduct Investigations, and invoke Suspensions. Coulson advocated for mandatory requirements for Transfer Agents to file all increases in shares of an Issuer.
Coulson stated the OTC Group has a published list of Lawyers who have written questionable Legal Opinion Letters.
Coulson stated the OTC Group has been given more authority to request additional information from all Issuers, and the OTC Group is downgrading an increasing amount of Issuers to Caveat Emptor for failure to provide requested information.
Coulson recommended that Transfer Agents be required to post accurate Outstanding Shares and to post all officers and directors of Issuers.
Coulson recommended that insiders and promoters be restricted from selling new share issuances for one year.
Coulson stated that even with all the warnings and protections the OTC Group provides that they " can't protect dumb investors ".
Closing statements from various panelists addressed dead shells being used to commit microcap fraud, and that vastly improved technologies allow viral frauds to happen quicker than can be detected, therein the need for a central repository for all Gatekeepers to access to identify the repeat offenders in order to expose a current fraud and take action BEFORE they can start their next fraud.
Panelists also discussed recent Bankruptcy companies where the SEC cannot access vital information and whereby the fraudsters are disseminating false information to manipulate the stocks.
The SEC has accelerated Suspensions of some BK stocks. General Motors was a cited example of stock manipulation and the SEC's delisting of GM stock.
The panel also recommended that Issuer websites be regulated because too many issuers disseminate false information.
The panel stated that SEC reporting microcaps are becoming a favorite of the fraudsters and schemers because they find ingenious ways to defraud on the strength of the reporting company's apparent legitimacy.
Many other comments were made throughout the Roundtable so interested persons should listen to the broadcast.
(posted by Renee)
> SEC Roundtable on MicroCaps "Video" has been archived now. http://www.sec.gov/news/otherwebcasts/2011/microcaproundtable101711.shtml