Just the other day, the Electronic Frontier Foundation issued a report on a little Georgia company called LIGATT Security International. You gotta love these guys. They don't just give a hoot about what people say about them on message boards, but they've gone to court to sue the ones that have said tewwible, mean things about them.This little OTC gem raises as many red flags as you'd find on the New York State Thruway when its blacktop is being resurfaced, and a good number are mentioned in the Electronic Frontier Foundation's report. But there's one that the EFF left out that fits right in with the image of the solid corporate citizen we're dealing with here: Just the other day, LIGATT executed a 1 for 2,000 reverse split. Ah, reverse splits. Is there any more reliable sign of a company's non-investment-worthiness? With one stroke of the pen, reverse-splitting companies can artificially boost their share prices, with no limit except the size of their chutzpah. Why, just about every flea-bitten OTC company west and east of the Pecos is doing them nowadays, it seems. At the same time that LIGATT was giving its shareholders this gift -- as typically happens during reverse splits, the share price plummeted -- other fine little companies were doing the same thing. Some were just as ambitious as LIGATT. Right after LIGATT, a Pink Sheet company called U.S. National Telecom, Inc. had a 1 for 2,000 reverse split. Now all this would be just an amusing sidelight to the market if it weren't for the fact that it's not just laughingstock, anonymous-message-board-suing companies and OTC dregs that are tossing their shareholders in the ditch this way. Some far more significant companies have either recently had reverse splits, or are considering doing so. E*Trade ( ETFC - Get Report), the company with the funny babies in the TV commercials (and much of my money since I have an account there) had a 1 for 10 reverse split in early June. Citigroup ( C - Get Report), having received shareholder authorization -- which proves how meaningless shareholder votes truly are -- is also considering one. Market scuttlebutt also points to Sirius XM ( SIRI - Get Report), known in the media world as Howard Stern's boss, and known in the world of stock market crackpots as a subject of goofy naked short-selling conspiracy theories. Blockbuster ( BBI) tried to get authorization for a reverse split but couldn't get shareholder approval (which proves that shareholder votes aren't always meaningless, I guess). As a result, its shares had to be delisted from the New York Stock Exchange.
Blockbuster's experience points to why downtrodden but respectable companies (and I'm including Sirius in that description, despite the crackpot following) consider such draconian steps to boost their share price. Hey, it's just plain embarrassing to be delisted from a stock exchange. Sirius has been trading at just over a buck recently, just above the level at which it might be kicked off Nasdaq. So I can sympathize, especially since reverse splits don't always mean purgatory for their investors when larger companies engage in that practice. For instance, E*Trade, though down a bit after the reverse split, has been holding its own. Though I'm not a shareholder, as a customer I'm not sure how I'd feel about E*Trade being delisted. It wouldn't exactly thrill me, that's for sure. I'm sure that the folks at YRC Worldwide ( YRCW - Get Report) and National Coal ( NCOC) felt the same way when they announced their reverse splits, both doing so with Nasdaq's listing department breathing down their necks. Sympathetic as I am, the more I think about reverse splits, and not just the ones from the real gems like LIGATT, the more I think that they're a menace and need to be stopped by the ever-vigilant watchdogs at the Securities and Exchange Commission. Sure, reverse splits keep companies from being delisted. But I don't think that's necessarily a reason to rejoice. There's a reason for listing standards, and companies that can't abide by them need to be... well, they have to be delisted. Otherwise, what's the point of having listing standards? Anyway, they are more frequently used not by the Sirius XMs and Citigroups of this world, but by OTC companies that deserve to have plenty of 0s in their share prices, to the right of the decimal point. Now, don't get me wrong. I'm not seriously expecting an agency led by an Equities Magazine cover girl to do something quite so basic to help investors. Just put that down on a long list of " SEC shouldas," right after "the SEC should stop companies from filing bogus lawsuits to silence critics."