Federal regulators said Monday that they are suspending hundreds of stocks from companies that appear to be dormant, because such stocks are often ripe for investment fraud.
And at least two of the suspended “dormant shell companies” were from Minnesota, a spokesperson from the U.S. Securities and Exchange Commission (SEC) told Twin Cities Business.
The latest wave of stock suspensions is part of an ongoing SEC initiative dubbed “Operation Shell-Expel,” which began in 2012. The agency has been attempting to clean up the over-the-counter stock market by removing stocks of companies that are no longer operational.
Such shell companies are often at the center of so-called “pump and dump” schemes, through which fraudsters identify inactive companies and buy their thinly-traded microcap stocks (often called “penny stocks”) at a low price. The buyers then make misleading statements about the stock to boost its price, and they subsequently sell the shares at an inflated price.
The SEC called such shell companies “ripe for abuse in the over-the-counter market,” and it has shut down the trading of hundreds of stocks since launching Operation Shell-Expel.
“Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells,” Andrew J. Ceresney, director of the SEC’s enforcement division, said in a statement.
Two Minnesota “Shell Companies”
The latest round of 255 stocks that are being suspended include shell companies from 26 states and two foreign countries, according to the SEC.
An agency spokesman told Twin Cities Business that two of them—MagStar Technologies, Inc. (traded under the symbol “MGSR”) and Market 99, Ltd. (“MNTY”)—were incorporated in Minnesota. It's unclear whether the other companies operated in the state.
See the full list of suspended stocks here.
Several websites accessed Monday indicated that MagStar was a Hopkins-based firm that created medical device components, although the company’s website itself no longer appears to be operated by MagStar. Less information was readily available about Market 99, and an over-the-counter stock website said it was unable to contact the firm.
The suspended stocks can only be relisted if their companies provide updated financial information to prove they are still in business—but it appears that once the SEC has identified and suspended a stock, it's unlikely the shares will resume trading.
“It is extremely rare for a company to fulfill this requirement, so the trading suspension essentially renders the shells worthless and useless to scam artists,” the SEC said.
Trading “Over the Counter”
The stocks targeted by the SEC have very little market value but represent an opportunity for fraudsters. The over-the-counter markets are, however, also home to some well-known Minnesota companies.
Major stock exchanges like Nasdaq and the New York Stock Exchange (NYSE) have strict listing requirements—and if publicly traded companies are unable to meet those benchmarks, they may elect to move their shares to an over-the-counter market, which does not have minimum listing requirements.
For example, Minneapolis-based Dolan Company—one of Minnesota’s 50 largest public companies—was recently delisted from the NYSE after its stock fell more than 90 percent over the course of three months.
The company, unable to keep its stock price above $1 per share, moved its shares to an over-the-counter market called OTCQB and changed its symbol from “DOLN” to “DOLNP” for the new market.
And at least two other large Minnesota companies made similar moves after being delisted in 2013.
Plymouth-based Urologix, Inc., a medical device maker, moved to the OTCQB, where it trades under the ULGX ticker.
And Granite City Food & Brewery, Ltd, a St. Louis Park-based restaurant chain, also made the move after it was delisted from Nasdaq. Granite City subsequently took the additional step of deregistering its shares altogether, saying it wanted to eliminate the costs of disclosing certain information to the SEC.