(A Short Essay for a Intro to Bussiness Class) In the October 14th issue of Businessweek there is an article entitled “Cavwat Entrepreneur” by Michelael Schroeder. This artical details how modern day stock fraud scams are committed and it details one such example. In brief, the conmen target a small, non-public company that has the prospects of growth. They promise its managers finanial assistance by merging it with a public company in financial trouble, getting the public listing with minimal disclosure. The conmen pump in money, aquiring ventures, while taking control by placing cohorts on the board of directors.
They then do a reverse stock split to boast the stock price and reduce the number of shares (in the example the number of shares outstanding dropped from 10 million to about 500,000, which caused the stock’s price to rise from 34 cents a share to nearly $7.00 a share). Then the board of directors quietly issued millions of additional shares, which they and the conmen snapped up, registering the shares through SEC loopholes. Next they get brokers to push customers to buy the stock, which increases the stock’s price. When the stock price is high enough, the hustlers then unload their shares, employing off-shore accounts to hide the profits. What makes this type of stock fraud often go undetected is the fact that the conmen work through leditmate companies and not some sham organization.
By the time anyone figures out that a crime has been committed, the conmen have their money in off-shore accounts. This is a good case of what happens when there are no checks on busunessmen. All the stake-holders in the company that was used by the conmen lose, because once it is made known what has happened, the stock becomes worthless, and a successful up and coming company is destroyed by such a stock scam. Personally, I believe that steps should be taken to tighten up the regulations in such mergers, so that these sorts of stock frauds can be stopped. Changing the minimal disclosure reguirements, and corking the SEC loopholes would be the best steps to take to correct this problem.