Scam Plays and DTC "Chilled" Stocks - Beware of Both

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This is an intesting blog post about DTC

http://www.securitieslawyer101.com/dtc-conspiracies/

Posted by Brenda Hamilton,Attorney, Boca Raton
Hamilton & Associates Securities Lawyers
October 1, 2012

The Depository Trust Company (DTC) is the only stock depository in the U.S. When DTC provides services as the depository for an issuer’s securities, its securities can trade electronically. Without DTC eligibility, it is almost impossible for an issuer to establish an active market in its securities. Issuers must satisfy specific criteria established by DTC to receive initial DTC eligibility, and to remain DTC eligible. Even after an issuer’s securities become DTC eligible, DTC may limit or terminate its services. DTC limits its services by placing a chill (“DTC Chill”) on a security and terminates its services by placing a lock (“Global Lock”) on the security.

Is There A DTC Conspiracy?

When DTC eligibility is limited or terminated, issuers and their securities attorneys scream foul asserting various conspiracy theories involving short sellers, large clearing firms and purported agenda of the Securities and Exchange Commission (“SEC”). The simple reality is that microcap issuers lose DTC’s services primarily for two reasons, illegal issuances of free trading securities based upon flawed tradabililty opinions and fraudulent investor relations activity.



DTC has a number of options when it has concerns about the eligibility status of a newly eligible security, or detects fraudulent activity, including limiting or suspending its services for the security. DTC may also make referrals to the appropriate regulatory authority including the Securities and Exchange Commission (“SEC”).

When DTC eligibility is lost, issuers will often tell their stockholders, they do not know the cause of DTC’s actions. Since only the issuer can direct its transfer agent to issue free trading shares, most often the issuer is aware of why DTC limited or suspended its services. Many officers and directors of microcap companies are facing the harsh reality that reliance upon a legal opinion will not provide them with an effective defense to securities violations.

What Is Really Going On?

DTCC’s Office of Corporate and Regulatory Compliance monitors unusually large deposits of microcap securities that are deposited into DTC when there is a suspicion or indication that the issuer or persons associated with the issuer have violated the securities laws.

With Microcap stocks, this behavior typically involves the deposit of large blocks of unrestricted securities in reliance upon flawed legal opinions rendered in connection with convertible notes, reverse merger transactions or Rule 504 offerings.

Where any of the foregoing are present, the issuer should expect a review by DTC and to provide a legal opinion from an independent securities attorney.

Does FINRA Rule 6490 Have Anything To Do With This?

DTC review is also prompted when issuers provide notice to the Financial Industry Regulatory Authority (“FINRA”) pursuant to Rule 6490, of name changes, stock splits, dividends, reverse mergers and spinoffs. While FINRA reviews the corporate action prompting the notice under 6490, DTC reviews matters related to the issuer’s shares including the tradability of the securities it holds on deposit.

During this review, DTC may discover (previously undetected) illegal free trading share issuances or other fraudulent activity causing DTC to limit or suspend its services. In these instances, DTC may make referrals to appropriate regulators including the SEC’s Division of Enforcement.

How Will A DTC Chill or Global Lock Impact Trading?

A DTC Chill restricts DTC’s services, including limiting a DTC participant’s ability to make a deposit or withdrawal of a chilled security. A DTC Chill may be for a few days or an extended period of time depending upon the reasons for the chill and whether the issuer or transfer agent rectifies the cause of the chill. A “Global Lock” is a termination of all of DTC’s services to an issuer. Like a DTC Chill, a Global Lock may last a few days or an extended period of time, depending on the reason for the Global Lock. If the cause for the Global Lock cannot be corrected, then the security will be removed from DTC’s depository, and transactions in the security subject to the Global Lock will no longer be eligible to be cleared at any registered clearing agency. When this happens, trades can only take place upon physical delivery of stock certificates between buyers and sellers which could take weeks for settlement.

DTC does not always disclose the reason for a chill or Global Lock, or how long it will be in effect. DTC Chills and Global Locks are publicly available at http://www.dtcc.com/legal/imp_notices.

Should Issuers Hire DTC Chill Removal Specialists From The Internet to Fix A Chill?

Recently, numerous websites have popped up claiming that they can remove DTC Chills and Global Locks. The irony is that most of these service providers particpate in the activity that causes the loss of DTC’s services. For example, DTC Chill removal services are offered by the same lawyers who rendered flawed tradability opinions and the same transfer agents who knowingly or blindly accepted these opinions causing the issuance of illegally free trading shares and the loss of DTC’s services.

Similarly, stock promoters with pump and dump websites now tout that they can remove DTC Chills despite that their own investor relations services have resulted in numerous DTC Chills.

There are only two people who can help you remove a DTC Chill. These are a lawyer acceptable to DTC to render a tradability opinion and a DTC Market participant to request DTC provide its services with respect to a security. Anyone else purporting to provide services for DTC eligibility or DTC Chill removal is unable to provide the services required.

Will DTC Ever Remove a Chill or Global Lock?

In some circumstances, DTC obtains additional information from the issuer and its securities counsel regarding the suspicious activity and may not limit its services or may remove a DTC Chill with respect to the securitiy. Removing a DTC Chill is not an easy task. Removal requires among other things, an opinion from securities counsel concerning the (“free trading”) shares held on deposit by DTC and a DTC Participant such as a market maker to make a request that DTC resume services. DTC reserves the right to refuse to rely upon the opinion of any issuer’s securities counsel. In recent months, the SEC has brought multiple enforcement actions against attorneys in connection with tradability opinions rendered for micrcap issuers. Often these actions are preceeded by a loss of DTC eligibility. Because DTC may chose to refer securities violations it discovers to the SEC’s Division of Enforcement, qualified legal counsel is critical at all stages of the DTC process particularly when providing information on the issuer’s behalf. As such, the selection of counsel to address DTC opinions should no longer be considred a routine legal matter.

For further information about this article, please contact Brenda Lee Hamilton, Securities Attorney, at [phone] or by email at [e-mail]. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group, 101 Plaza Real South, Boca Raton, Florida and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates at [phone] or by email at [e-mail]. Please note that the prior results discussed herein do not guarantee similar outcomes.