Shell Companies on OTC Market
Attract Attention of Regulators
By JOHN R. EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL
Cleaning up the market for very-small stocks has once again proved as frustrating as weeding dandelions.
Recent moves by some companies on the scandal-scarred OTC Bulletin Board, where some of the tiniest non-Nasdaq stocks are listed, have drawn a sharp reaction from the Securities and Exchange Commission.
Dozens of small companies -- including some with possible connections to stock swindlers -- have found a way to perhaps get around the new rules that are designed to delist from the Bulletin Board any that don't make enough financial disclosures. How? The companies are simply buying up dormant shell companies that technically meet the new reporting status.
Presto: The clever companies can argue they are in compliance with the rules, and thus can stay on the Bulletin Board. One regulator calls it a "loophole" in federal securities laws to get around the new listing requirements.
"We are very concerned," says Richard K. Wulff, chief of the SEC's office of small business. He and other SEC officials say they fear that some companies are using their shell purchases as a way to put off reporting vital corporate information for months -- thus frustrating the very aim of the Bulletin Board reforms. Mr. Wulff said such reporting gaps would be "outrageous."
The Bulletin Board is operated by the National Association of Securities Dealers, but is separate from the NASD's Nasdaq Stock Market, which has higher requirements. Most of the 6,000 stocks on the Bulletin Board aren't of a questionable nature, of course. But there have been problems with many of the stocks there, and officials estimate that by June they will weed out about half the companies there for failing to meet the new reporting-status requirements.
The issue comes as Bulletin Board companies have drawn the interest of online traders, which has produced huge volume and volatility in many stocks and helped set the stage for some major stock frauds, according to law-enforcement officials.
The shell boomlet caught regulators by surprise, says Lisa Roberts, the NASD's director of Nasdaq listing qualifications. She estimates that several dozen Bulletin Board companies have already taken this route.
Earlier this month, the SEC sent the NASD a letter about what it called this "back door" registration procedure. The SEC said shell purchasers would have to file audited financial statements with the commission within 15 days of using this method to claim reporting status.
There is a reason, clearly, that regulators want small companies to disclose more about themselves.
Take the case of FindEx.com Inc., which last month bought a shell company called Reagan Holdings Inc. FindEx.com is an Omaha, Neb., online supplier of business and financial and religious information. In announcing the Reagan purchase, FindEx.com said that buying the shell gave it "fully reporting" status that it didn't have before.
But investors might have been better served if FindEx.com had reported more about itself. Investors started digging into FindEx.com in May of last year after the company's stock price soared (it is currently at about $6). Internet stocktraders found on a news-release service a FindEx release dated May 17, 1999, announcing a new president and chief executive, Joe Szczepaniak.
A contact phone number for Mr. Szczepaniak led not to Nebraska but to the Florida offices of Lionel Reifler and Yanni Koutsoubos.
Mr. Reifler, according to SEC records, has three SEC civil injunctive actions against him enjoining him from future violations of securities laws, and a 1989 stock-fraud conviction. In a 1999 phone interview, Mr. Reifler strongly denied having any connection to FindEx.
Mr. Koutsoubos, in a phone interview last year, said he worked for a firm that owned FindEx shares. He acknowledged having been sued by the SEC but couldn't recall the details. SEC records show that the only case involving a Koutsoubos in the past 20-plus years ended with the person, identified as Ioannis Koutsoubos, being enjoined in the early 1990s from future violations of securities laws in connection with an alleged illegal stock-sale scheme. A federal court in San Antonio in a civil-lawsuit judgment concluded that a Yanni Koutsoubos also goes by the first name Ioannis, but Mr. Koutsoubos in the interview denied being Ioannis.
Also during a phone interview last year, FindEx's Mr. Szczepaniak said he knew Mr. Koutsoubos and had met Mr. Reifler but that he didn't think either had a role at the company. As for their phone number in the release, Mr. Szczepaniak said he met that day with his FindEx predecessor at Mr. Koutsoubos's office. He added that he didn't know why the meeting was held there and said that Mr. Koutsoubos didn't attend. Messrs. Szczepaniak, Koutsoubos and Reifler didn't return phone calls seeking comment for this article.
The new shell games at Bulletin Board firms started after the SEC and the NASD began moving to toughen the requirements for being listed on the Bulletin Board. Last year, regulators began requiring that all companies wishing to retain their listing would have to become "reporting" firms. This meant the companies would have to begin filing periodic financial statements and other reports with the SEC or other appropriate agencies -- a practice long required of companies on Nasdaq and on the New York Stock Exchange. NASD officials set staggered deadlines under which each of the Bulletin Board companies would have to be fully reporting.
NASD officials say hundreds of companies have already been removed. (Companies that are dropped are still publicly traded, usually in the so-called Pink Sheets, but investors could have a harder time getting stock-price quotations.)
Many of the dropped companies haven't been able to get their initial registration statement, which includes detailed financial information, cleared quickly enough by the SEC because of agency questions about the accuracy or adequacy of the filing.
PayForView.com Corp.'s choice of the shell route was a matter of "purely timing," says Marc Pitcher, president of New York Internet distributor of entertainment events. "We were approaching zero hour of being dropped to the Pink Sheets," says Mr. Pitcher, adding that his firm plans to promptly and regularly file with the SEC all necessary financial information.
This new source of demand has "made it more of a seller's market for shells," says Louis Taubman, a New York lawyer and part of a group that recently created and sold three shells to Bulletin Board companies.