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News Release: 99-18
GRAY DAVIS, Governor
Date: 12/28/99
WILLIAM KENEFICK, Acting Commissioner
Department of Corporations Issues Warning About Micro-Cap Securities Fraud
Sacramento, December 28, 1999 — The Department of Corporations joined other state securities regulators today in warning investors that despite a crackdown in recent years by state, industry and federal securities regulators, small-stock fraud remains a serious problem, costing investors many millions of dollars each year. The Bull Market on Wall Street shouldn’t lull investors into letting their guard down, state securities regulators warned, as they joined in announcing a new brochure addressing so-called "micro-cap" stock fraud.
Micro-cap stocks are low-priced shares in little-known companies traded on the electronic Over-the-Counter (OTC) Bulletin Board or in the "Pink Sheets" rather than on the New York, American or NASDAQ stock markets. Micro-cap stocks are vulnerable to manipulation because of their small "floats" — the number of shares available to trade — and a dearth of public information about many of the companies.
Micro-cap shares are often hyped through: high-pressure, cold-calling stock brokers; misleading press releases; self-serving newsletters; and increasingly over the Internet via "spam" e-mail, Websites, chat rooms and bulletin boards. As the hype and stock price increases, stock promoters or brokers dump their shares on the market, leaving hapless investors with large losses. This scheme is known as the "pump and dump."
Over a one-year period, state enforcement actions against three micro-cap dealers in California resulted in the closure of their offices: Investors Association of Hackensack, New Jersey in August 1997; Biltmore Securities of Fort Lauderdale, Florida in September 1997; and Pacific Cortez Securities (also known as La Jolla Capital Financial Corp.) of San Diego, California in December 1998. In addition, the Department of Corporations has worked in cooperation with other state regulators and law enforcement to close down what regulators call "fraud factories," such as Stratton Oakmont, Hibbard Brown, Monroe Parker, and others. These security firms specialized in micro-cap stocks sold into California from other states.
A new publication, "Micro-Cap Fraud," spells out the risks to investors. It is available from the North American Securities Administrators Association (NASAA) Website (www.nasaa.org) and the Department of Corporations Website at (www.corp.ca.gov) under "Investor Education." Information on avoiding micro-cap stock fraud is also available on the Website of the Securities and Exchange Commission at (www.sec.gov).
The new NASAA brochure urges investors to do their homework and check out any broker pushing low-priced securities. Micro-cap stocks are often touted and sold by promoters or brokers who have been barred from the securities industry or have long disciplinary histories. Investors should always get written information about the company such as a prospectus, and pay attention to such topics as risk factors, management, financials, products, and use of proceeds from the stock offering.
Before buying a micro-cap stock, investors can call the Department of Corporations’ Consumer Services Representative in Los Angeles at (213) 576-7643; or NASAA at (202) 737-0900; or the National Association of Securities Dealers’ hotline at (800) 289-9999 to find out if the broker or his firm has a disciplinary history.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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