Investigators looking into an alleged penny stock fraud involving GSS Venture Capital Corp. no doubt would have liked to ask Pele Lechien how he came to own 200,000 shares of the Utah corporation.
Unfortunately, that was quite impossible.Pele turned out to be disbarred New York lawyer Thomas Quinn's real estate agent's dog, a Securities and Exchange Commission official reported.
In many ways, Pele fit the profile of a perfect nominee, or puppet, shareholder. He probably did what he was told and never complained about investments made in his name.
Unlike Pele, most nominee shareholders used by crooked promoters in stock manipulation schemes are real people. But many understand little more than would a faithful hound about how and why they are being used.
When a friend who is a promoter or broker hands them some money and asks them to buy stock and sell it back or just to sign a few papers for 50 bucks, regulators say, few nominees realize they are becoming a vital link in a chain of illegal stock price manipulation.
Educating and/or prosecuting these puppet shareholders so they'll be less willing to help perpetrate a fraud was one of several suggestions the Deseret News received when it asked some people familiar with the Salt Lake market how penny stock fraud could be reduced.
Along with education, some called for better enforcement, additional disclosure and record-keeping requirements and expanded regulatory resources. Others recommended outlawing penny stocks altogether.
-Penny stock elimination - Former Colorado securities commissioner Royce Griffin advocated a total ban, saying: "There's not any particularly good reason to sell stocks for a penny or two cents a share other than to facilitate manipulation of stocks. . . . If you're going to raise $500,000, you can do it at a dollar a share as easily as you can at a penny a share."
He said it's a fallacy that the penny stock market helps small businesses raise capital for growth, because most companies that issue penny stock have no real business - they just sell stock and disappear. But Griffin said industry political pressure likely will keep Congress and many state Legislatures, including Utah's, from ever banning penny stock.
Several observers consider Griffin's solution too drastic.
Douglas Griffith, a former SEC attorney now in private practice in Salt Lake City, said penny stocks ideally could help growing companies, which truly do need and have trouble obtaining venture capital. But in practice, he added, he's found Salt Lake brokerages to be more interested in merging small companies into blind pools than in underwriting public offerings for them.
-Resources: Federal and state regulators uniformly spoke of the need for more money to pay investigators and attorneys. Sherwood Cook, formerly director of registration for the Utah Securities Division and now head of Nevada's Securities Division, said the Utah division cannot pay enough to keep its talent, so it is constantly training new people.
Although Utah Securities Division Director John Baldwin stressed that the Legislature has been fair with him, he said he "lusts" after the near-quadrupling of its budget that Florida's securities division recently received.
More than one person said that historically, the Legislature has been reluctant to adequately fund the Securities Division or pass tough laws because of industry influence. But Baldwin said he hasn't encountered that.
-Enforcement: Stewart Walz, criminal division chief in the U.S. Attorney's Office for Utah, praised the SEC's new willingness to refer penny stock cases for criminal prosecution. Locally, he said, the SEC and U.S. Attorney are cooperating closely, but things could work better if the SEC had a criminal investigative arm.
The SEC still relies heavily on a civil remedy called the consent injunction, in which a defendant neither admits nor denies that he ever did anything wrong but promises not to do it in the future. Then if he's caught engaging in the enjoined behavior, he can be held in contempt and imprisoned.
Kenneth Israel, Salt Lake SEC branch chief, said an injunction has some effectiveness against local violators. But Walz was more pessimistic. "Nobody in the penny stock market cares, because they can make so much money being crooks, so an injunction has no effect here."
Salt Lake attorney Jerome Mooney said the SEC's new crackdown is scaring people but not helping to clean things up. He said officers and directors of small public companies who get drawn into bad situations by others are unlikely to seek the SEC's help because they're afraid of going to jail. "There needs to be almost an amnesty" so the company's problems can be addressed, he said.
-Education: More than one person said a major problem in Utah is its sheer legacy of decades of penny stock fraud. Cook said some abusive practices, such as insider trading and hyping worthless stock, have such a long history in the Salt Lake market that many people think they're OK.
Mooney said education is needed not only for investors but also for officers and directors of public companies and even local promoters. "Some of them are down and out crooks," he acknowledged, but others have simply learned to do their work wrong and need retraining.
-Disclosure and record-keeping: Securities attorney O. Robert Meredith said one reason many small companies scramble - legally or illegally - for exemptions from registering their stock is that registration requirements are cumbersome and confusing. He suggested doing away with exemptions for small companies and creating a simple, uniform registration form for them to file.
Larry Bergmann, SEC associate director for market regulation, said it can be hard for investors who buy a penny stock after its initial offering to find out about the company. Companies must furnish information to the brokerages making a market in the stock, but often an investor doesn't buy directly from them, and there's no readily available place for him to get information, since many small companies don't have to file SEC reports. There's talk of creating a central library, but the cost may be too high, he said.
Several other recommendations centered on the people whose involvement is crucial to a successful swindle - a company's officers and directors, initial shareholders, transfer agent and brokerage houses. Ideas included making officers and directors sign statements - under penalty of perjury - that they, and not any promoter, are running the company, and making shareholders swear that they are the real owners of the stock or name the people who are.
Attorney James Barber said auditors and attorneys who provide opinions on companies should have to keep on file certain information to prove that they verified the facts on which they relied.