An irreverent Wall Street Blog
by Bill Singer
Join BrokeAndBroker blog on Facebook  Follow the BrokeAndBroker blog on Twitter  Connect with BrokeAndBroker on LinkedIn  Join Bill Singer on Google+  Subscribe to RSS Feed

Written: March 2, 2015

Few queries get my blood more agitated than those in which a client asks my thoughts about the potential acquisition of a so-called Shell Company as part of a reverse merger. The theory is that it's quicker and cheaper to get public by reverse engineering the process through the acquisition of what I often call the "walking wounded": an inactive, publicly traded company gathering dust on some farflung shelf.  This approach is less a bona fide bit of corporate structuring than a cynical wink that greets you a a darkened backdoor in some tawdry alley. 

The common theme among these shells are they are trafficked on the OTC market and largely exist in name only.  Upon inspection,  these companies have no discernible assets, revenue, or operations. 

Ahhh, but the do come with one hell of a pitch:

There’s a deal brewin’. Keep this between us, it’s hush-hus, but [insert name of high-flying tech firm] is getting ready to acquire the company because of its cutting-edge {choose one: intellectual property, software, or technology]. 

Welcome to the land of bull shit and reverse merger. 

Okay, sure, you can have a legit reverse merger in which a private company is acquired by a public shell and, as a result, the shareholders of the private entity wind up in control of the public entity and, voila, the private shares are transformed into publicly traded ones. It’s fast. It’s quick. It’s also the stuff of Three Card Monte and street-corner shell games. I mean, seriously, think the whole transaction through? Does it send credible? Admittedly, there are some reverse mergers that are honest and legal and truly about the economies of time and money. They are, however, few and far between.

My normal response to folks asking about buying shells is to run, don’t walk, as far away from that crap as you can. At best, getting involved with such garbage is little more than snorkeling in a cesspool frequented by pumpers and dumpers and all sorts of lowlife stock promoters and con artists. I trust my thoughts on this topic are clear?

In 2012, the Securities and Exchange Commission (“SEC”) rolled out Operation Shell-Expel as part of a frontal attack on the unseemly underbelly of listed but dormant stocks. The SEC hopes that this effort will prevent pennystock and microcap manipulators from foisting shells on an unsuspecting public as part of a pump-and-dump campaign that victimizes many investors.   The SEC asserts that during the nearly three years of Operation Shell-Expel, it has suspended trading in over 800 microcap stocks, or about 8% of the OTC market. Although a suspended stock can obtain relisting via updated financials and proof that it’s a bona fide operating entity, in truth, the shadowy figures behind such nonsense tend to close shop once the SEC sends its calling card.  

On March 2, 2015, the SEC announced it has suspended trading in 128 inactive penny stock companies to ensure they don’t become a source for pump-and-dump schemes. READ: "SEC Suspends Trading in 128 Dormant Shell Companies to Put Them Out of Reach of Microcap Fraudsters" (Press Release, 2015-44, March 2, 2015). As noted, in part, in the March 2, 2015, Order of Suspension:

It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of each of the issuers detailed below because questions have arisen as to their operating status, if any. Each of the issuers below is quoted on OTC Link operated by OTC Markets Group, Inc. OTC Markets Group, Inc., however, has been unable to contact each of these issuers for more than one year. In addition, the staff of the Securities and Exchange Commission has independently endeavored to determine whether any of the issuers below are operating. Each of the issuers below either confirmed that they were no longer operating or were now private companies, failed to respond to the Commission’s inquiry about their operating status, did not have an operational address, or failed to provide their registered agent with an operational address. The staff of the Securities and Exchange Commission also determined that none of the issuers below has filed any information with OTC Markets Group, Inc. or the Securities and Exchange Commission for the past year

Compliments to the SEC for a job well done!


Written: March 2, 2015

An opportunity presents itself for you to get involved in some business deal outside of your broker-dealer.  The way you see it, your role won't be particularly active. In fact, other than setting up a corporation or limited liability company, you're probably not going to be doing much beyond some routine office management and, hopefully, cashing some paychecks.  In the back of your mind, however, something is gnawing at you. Maybe you're supposed to notify your employer before moving forward? Naaah, this is only a few hours a week and it's all pretty low-key and passive. Not the kind of thing you have to notify your brokerage firm about or get its approval; and, after all, you asked around the branch and the water-cooler lawyers all said that it's no one's business when it comes to your outside business.  You could have run it by an industry lawyer for a few hundred bucks but ultimately decided it wasn't worth the legal fees. Consider this recent case in which the lack of notification to the firm proved disastrous.

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, James Rosebrough submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of James Rosebrough, Respondent (AWC #2013038263201, February 23, 2015).

In 2001, Rosebrough entered the securities industry and through 2015 he was employed with four FINRA member firms. During the times relevant to this matter, he was registered with LPL Financial LLC.  The AWC asserts that he had no prior disciplinary history in the securities industry

The Condo LLC

The AWC asserts that in July 2011, Rosebrough and a colleague were operating their brokerage and an insurance business from an office condominium complex. In order to purchase the premises from which they were conducting business, the colleagues formed a limited liability company (the “LLC”). The AWC asserts that Rosebrough was a partner of the LLC, and his duties included collecting and depositing rent and paying bills; and, further, since the LLC’s inception, Rosebrough had received about $3,500 in income from this business.

The Residential LLC

In February 2013, Rosebrough and an LPL customer purportedly formed another LLC for the purpose of acquiring and renting a single family residence. Rosebrough was a partner of this second LLC, and he was listed in the Articles of Organization as “Manager,” whose duties included collecting rent, paying bills and coordinating maintenance of the property.

By The Rules

Many registered persons engage in other professions and careers; and such Outside Business Activities ("OBA") typically requires prior written notice to your employer and obtaining the firm's approval. Consider the following:

FINRA Conduct Rule 3270. Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

*** Supplementary Material ***

.01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person’s responsibilities to the member and/or the member’s customers or (2) be viewed by customers or the public as part of the member’s business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member’s review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person’s outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).

FINRA alleged that Rosebrough failed to provide prior written notice to LPL about his OBA involving either of the LLCs.. FINRA further alleged thatin 2012, Rosebrough completed an annual LPL questionnaire and falsely answered “NO” to a question about whether he had engaged in an OBA. Finally, the regulator alleged that Rosebrough only first notified LPL of the OBAs in July 2013. 

Price of Non-Compliance

According to online FINRA BrokerCheck records as of March 2, 2015, LPL “Discharged” Rosebrough on September 5, 2013, based upon allegations that:


FINRA deemed that Rosebrough's OBA and non-disclosure constituted violations of FINRA Rules 3270 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Rosebrough a $5,000 fine and a 30-day suspension from associating with any FINRA member firm in any capacity.


Written: February 28, 2015

After Credit Card Expense Suspension, Stockbroker Barred By Liens And Judgments

If you were lucky to dodge a regulatory bullet, don't count on your deft footwork to bail you out a second time.  In a recent FINRA regulatory settlement, we have the circumstance of a registered person who improperly charged his firm's credit card for personal expenses and managed to resolve things via a relatively modest suspension and a fine.  Unfortunately, it was a short-lived reprieve and the second time he was named as a Respondent in a regulatory matter, his career would end in flames. READ

Sometimes a cigar is a cigar. Sometimes a fish is a fish -- or a grouper. Sometimes, however, federal prosecutors would have you believe that a fish is a digital drive on which evidence is written and archived and .  . . well, you know how the Law can be.  In today's Blog, we come across an equally provocative and absurd United States Supreme Court case, where we find a fisherman facing 20 years in federal prison for throwing fish overboard. Think I'm kidding? Consider this quote from the oral argument:

CHIEF JUSTICE ROBERTS:  But the point is that you could, and the point is that once you can, every time you get somebody who is throwing fish overboard, you can go to him and say:  Look, if we prosecute you you're facing 20 years, so why don't you plead to a year, or something like that.  It's an extraordinary leverage that the broadest interpretation of this statute would give Federal prosecutors.

Audio and Written Transcript of Oral Argument Online. READ

In some ways, this disaster started out admirably with a registered representative father trying to find a way to leave his book of business for his son. The Devil is in the details and how the father went about his plans made all the difference -- and not in a good way. After moving through the FINRA disciplinary process, we wind up at the SEC, not once but twice. READ

Stockbroker, Compliance, Legal, and Regulatory Jobs. READ

The hotly contested, high-profile Wall Street employment lawsuit of Wile v. FINRA found the industry's self-regulatory organization defending against charges by a former Deputy Regional Director. Plaintiff Wile's allegations touched on purportedly discriminatory practices involving disability, sex, and age -- and also brought an unflattering scrutiny of FINRA's arbitration forum. Consequently, the outcome of this federal lawsuit was of interest to many constituencies. Read how it all turned out. READ


Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+