Cases by the Justice Department and SEC against hijackers have unraveled a myriad of hijacking schemes varying in sophistication including some that were under the watchful eye of law enforcement.
Unfortunately, corrupt securities lawyers often manufacture and peddle entities to legitimate small businesses seeking to list on the OTC Markets. These transactions leave many small businesses financially devastated. The bottom line is hijacked shells are designed for pump and dumps and scammers are able to remain under the government’s radar. Some of the most notable pump and dump schemes of the last five years were possible because of corporate hijackings. The failure to properly investigate corporate hijackings in the penny stock markets is arguably the SEC’s greatest enforcement failure of the last decade.
The Corporate Victim in Hijackings
It is relatively easy to locate information about a public company using Edgar, OTC Markets filings, Secretary of State websites and corporate filings, company websites, and business and other directories. Using these sources to locate public shell companies for reverse merger transactions, fraudsters are able to determine a public company’s corporate status including whether it is active or inactive, its ticker symbol, present and former officers and directors as well as its last known contact information. With this information, fraudsters obtain new CUSIP numbers and enact name changes to hide their actions. Purchasers of these hijacked vehicles fail to recognize that they are at risk for an SEC enforcement proceeding or trading suspension regardless of whether they directly participated in the corporate hijacking.
Using publicly available information hijackers can determine if an entity’s corporate status has lapsed and when a company becomes delinquent in its SEC, OTC Markets and Secretary of State corporate filings, making it an easy target for a corporate hijacking. Using easily obtained public information, fraudsters have literally hijacked hundreds of companies and/or their stock symbols and sold these companies to private companies seeking to go public.
Why Corporate Hijacking is a CrimeIn the state of Florida, some hijackers file verified pleadings under Florida Statute 607.1430 and 607.1434, falsely stating that the Public Shell’s directors are deadlocked and its shareholders are unable to break the deadlock. In reality, there is no deadlock. We have reviewed numerous hijacking cases brought under Florida law where corporate hijackers have falsely represented the board of directors was deadlocked when in reality the corporation had only one director, Often by the time these hijackers are caught by management, they have undergone various acts which cause irreparable harm to the corporation including massive dilution to the legitimate shareholders.
The hijackers obtain control of the public entity by committing fraud either by lying in state court pleadings or in secretary of state corporate filings.
Upon identifying the hijacking target, fraudsters may engage in some or all of the following in order to obtain control of the public shell company:
- Obtain forms from the relevant Secretary of State website and pay a nominal fee to reinstate the dormant entity fraudulently executing the document as an officer or director.
- File a state custodianship or receivership action where the entity is formed using pleadings that falsely state among other things, that the custodian or receiver has not regulatory background or disciplinary history and will reinstate the operations of the issuer or take actions for the benefit of the existing shareholders.
- Change the hijacked entity’s corporate name and/ or create a new entity with the same or a similar name, often in a different jurisdiction.
- If the hijacked target is an SEC reporting issuer, file a Form 15 suspending the SEC ‘s reporting requirements by fraudulently executing the filing.
- Reverse split, restructure, reorganize and/or change the jurisdiction of the hijacked entity by merging it into the newly formed entity to conceal its true identity.
- Issue shares to the hijackers, receiver or custodian and nominees, which substantially dilute the then shareholders.
- Sell the hijacked entity to a private company seeking to be publicly traded for use in a reverse merger transaction with the proceeds of the sale being used to compensate the hijacker and the custodian or receiver.
- Notify the Financial Industry Regulatory Authority (“FINRA”), the company’s transfer agent and CUSIP Services of the reverse merger, new management and/or reorganization of the entity.
- Commence making filings on the OTC Market or Edgar. Corporate Hijackings – Red Flags Private companies considering a reverse merger transaction, as well as investors should look for these common red flags often found in corporate hijackings of public shell companies.
- Changes in management of the public shell company while it is inactive or shortly after its corporate charter is reinstated.
- State receivership or custodianship proceedings followed by reverse stock splits and/or large stock issuances which transfer shareholder voting control.
- Recent transfers of stock between entities or persons who received shares for services rendered in receivership or custodianship proceedings.
- Periods of inactivity in the Secretary of State corporate records of the public shell company;
- Reinstatement of an administratively dissolved corporate entity with the Secretary of State where the public shell company is domiciled.
- Changes in the state of domicile of the public shell company.
- Multiple corporations domiciled in the same state or different states with the same or similar names, which are controlled by the same person or persons.
- Accountants, lawyers and transfer agent principals and their family members and/or employees having voting control or beneficial stock positions of the public shell company.
- Changes of control or corporate name changes at times when the public shell company does not have an active business.
- Involvement of persons or entities in multiple public shell company or reverse merger transactions.
Regaining Control of the Hijacked Corporation
For the legitimate shareholders and management, it is timely and costly to regain control of a hijacked entity. The hijacked entities are often used in pump and dump schemes by the hijackers causing the private company purchasers to become embroiled in SEC investigations and the public entity to be the subject of SEC trading suspensions and its securities subject to DTC Chills and/or global locks.
To the extent that a private company is willing to expend the time and resources to become public it should do so the proper by way by filing a registration statement with the SEC and conducting an underwritten or direct public offering and avoid the growing risks and new requirements involving reverse merger issuers including corporate hijackings.
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