SEC Cracking Down on 'Shell' Trading

Stock scammers beware: The Securities and Exchange Commission is getting a bit more proactive these days.

In an unprecedented sweep, federal regulators temporarily suspended trading in 26 stocks Tuesday, because the companies failed to file periodic financial statements. At the same time, regulators are taking steps to stop those stocks from ever trading again by seeking to revoke their registrations.

The action is part of a new campaign by the SEC to root out and stop trading in shares of so-called shell companies, businesses that have largely ceased operations. Shares of shell companies, which trade on the largely unregulated market known as the pink sheets, are popular targets of stock manipulators.

The SEC crackdown reflects a more aggressive approach by federal regulators in combating securities fraud. The new attitude at the SEC is a response to criticism that regulators usually act only after a fraud is committed.

SEC spokesman John Nestor says the "pre-emptive" action on shell companies is intended to wipe the market clean of stocks that are "ripe for manipulation."

The crackdown will make it difficult for manipulators to use shell stocks for "pump and dump" schemes, a type of scam in which market charlatans buy large blocks of worthless stock and then drive up the price of those shares by making bogus claims about a company's prospects.

Another abuse the SEC wants to stamp out is a reverse merger, a process in which a private company backed by a group of manipulators purchases a shell company for a nominal fee.

But the SEC has its work cut out for it: Some estimate there are as many as 1,300 shell companies trading on the pink sheets and in other unregulated markets.

"It is fair to say this is not a one-shot deal," says Neil Welch, branch chief of the SEC's delinquent filing division.