A few weeks ago, the Securities and Exchange Commission (the “SEC”) issued its ”Enforcement Initiatives to Combat Financial Reporting and Microcap Fraud and Enhance Risk Analysis.” The SEC release identified financial reporting, microcap fraud and enhancing risk analysis as the SEC’s new enforcement initiatives. A stated target of the new task force will be reverse merger purveyors and securities attorneys.
The release emphasized the importance of the role gatekeepers—attorneys, auditors, broker-dealers, and transfer agents—play, or ought to play, in stopping fraud before it happens. All too often, unfortunately, those gatekeepers collude with the fraudsters. Now the SEC plans to target miscreants.
In recent years, the SEC and the Justice Department, have brought actions against numerous securities attorneys for their role in securities fraud schemes including pump and dumps, ponzi schemes,insider trading, money laundering, corporate hijackings, manufacturing public shell companies for reverse mergers, drafting bogus legal opinions and even forging legal opinions.
The Task Force
The SEC release states that the financial fraud task force will direct its efforts at the gatekeepers described above as well as other significant participants, such as stock promoters and purveyors of shell companies.
A good example of an alleged full-service fraudulent law firm is Carrillo Huettel, whose partners Luis Carrillo and Wade Huettel are currently fighting an array of charges. According to the SEC, the pair actively engaged in a pump and dump scheme run by Canadian promoters, profited from illegal shares of the stocks being pumped, committed mail fraud, aided and abetted, and committed securities fraud. The complaint in the case states further that the lawyers even helped the touts word their email blasts effectively. Currently Carrillo and Huettel are seeking to have the case against them dismissed, but their chances of that do not appear to be good. In the course of its investigation, the SEC subpoenaed and—after a protest in court by Carrillo Huettel—received a copy of the firm’s attorney-client trust account transactions. Given Carrillo Huettel’s long-standing association with prominent promoters, including Awesome Penny Stocks, and its participation in a number of reverse mergers, the SEC is now likely to initiate quite a few new investigations.
In recent years, the SEC as well as the Justice Department have brought actions against numerous securities attorneys for their role in securities fraud schemes including pump and dumps, ponzi schemes, insider trading, money laundering,corporate hijackings, manufacturing public shell companies for reverse mergers, drafting bogus legal opinions and even forging legal opinions.
Microcap Securities Attorneys and Other Gatekeepers
Keeping with the SEC’s trend of eliminating public shell companies demonstrated by Operation Shell Expel, it has identified gate keeper lawyers and shell purveyors as ripe targets for enforcement actions. Most likely this task force will eliminate the corporate hijackings plaguing the microcap markets being used by lawyers and others hiding behind fraudulent receivership and custodianship actions.
Private companies involved in going public transactions risk SEC Investigations and SEC Enforcement actions when hiring a securities attorney who appear in strings of reverse merger transactions and which serve as securities counsel to numerous issuers who have been subject to aggressive investor relations campaigns. In some instances, the attorneys charged have even been former staff attorneys for the Securities and Exchange Commission. Recent examples of SEC and/or Justice Department charges against attorneys formerly employed by the Securities and Exchange Commission include Jeanne M. Rowzee, Carl N. Duncan and Phillip Offill.
The SEC’s Microcap Fraud Task Force
The SEC’s Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. This will include securities attorneys rendering legal opinions. Microcap abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The SEC’s principal goal in establishing the Microcap Fraud Task Force is to develop and implement long-term strategies for detecting and combating fraud in the microcap market, especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.
The Microcap Fraud Task Force will build on the extensive and successful work of the Microcap Fraud Working Group to bring together enforcement and examination staff with common interests in detecting and preventing microcap fraud – in amassing data, developing new approaches to investigations in this sector of the market, and forging relationships with criminal law enforcement authorities. The Task Force will consist of SEC staff dedicated exclusively to investigation of participants in the microcap securities market.
Financial Reporting and Audit Task Force
The Financial Reporting and Audit Task Force dedicated to detecting fraudulent or improper financial reporting, whose work will enhance the Division’s ongoing enforcement efforts related to accounting and disclosure fraud.
The Microcap Fraud Task Force targeting abusive trading and fraudulent conduct in securities issued by microcap companies, especially those that do not regularly publicly report their financial results.
The Center for Risk and Quantitative Analytics employing quantitative data and analysis to profile high-risk behaviors and transactions and support initiatives to detect misconduct, increasing the SEC’s ability to investigate and prevent conduct that harms investors.
Andrew J. Ceresney, Co-Director of the Division of Enforcement stated, “These initiatives build on the Division’s unmatched record of achievement and signal our increasingly proactive approach to identifying fraud. By directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity.”
The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the SEC’s efforts to identify securities-law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. The principal goal of the Task Force will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. The Task Force will focus on identifying and exploring areas susceptible to fraudulent financial reporting, including on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model.
The SEC’s Center for Risk and Quantitative Analytics
The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the SEC’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. It will work in close association with other Commission offices and divisions, especially the Division of Economic and Risk Analysis, and provide guidance to the Enforcement Division’s leadership on how to allocate resources strategically in light of identified risks. As a central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.
If your private company is seeking to go public, it is of critical importance that you exercise caution when engaging a securities attorney. The SEC’s release demonstrates why private companies seeking to go public must avoid potentially dishonest gatekeepers and hire a qualified securities attorney who does not wear the hat of a “deal maker” as well as that of a lawyer. The company should be equally careful in its choice of transfer agent, auditor, and sponsoring market maker.
If a a private company is willing to expend the time and resources to become public, it should do so the proper way, by filing a registration statement with the SEC and conducting an underwritten or direct public offering, thus avoiding the growing risks and new requirements involving reverse merger transactions and public shell companies. In the end, this method is no more expensive, and a lot less risky.
For more information about SEC and Justice Department actions against securities attorneys please visit the Securities Lawyers Gone Wild Series of our blog.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at firstname.lastname@example.org or visit www.reversemergers101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group 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. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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