10 Jul SEC Evolves Microcap Enforcement Group into Task Force

Last week the SEC announced a formal task force charged with reducing fraud in the microcap stock space. According to their release the task force will “investigate fraud in the issuance, marketing, and trading of microcap securities.” They are especially focusing on companies that do not regularly report financial and other results. They are worried about online stock promotions intended to manipulate trading. They also plan to target what they call the “gatekeepers” such as lawyers, accountants and others working with these companies.

This evolves out of a microcap fraud working group set up in 2010. I was a speaker at a roundtable the group put together. The most interesting question from a panelist (paraphrasing): “If we acknowledge that there is no way to end all fraud, then in fashioning regulations that are meaningful don’t we have to ask what fraud is essentially tolerable?” The working group, whose mission was to gather information and data, will continue separately from the task force, but they will work together. With the task force, we now have a group dedicated full time to going after microcap fraud from an enforcement perspective. The task force will be run by folks in Miami and New York. I guess no surprise there.

I’m a consistent proponent of doing all things possible to get rid of bad guys and disincentivize illegal behavior in the trading markets. In my world of reverse mergers there has sadly been too much fraud. This hurts all the legitimate players utilizing a legitimate technique and results in additional regulation that burdens everyone because of the actions of a few. Enforcement actions can really make a difference, sometimes more effectively than additional rules and restrictions on behavior.