WASHINGTON (AP) -- Extending their fight against small-stock fraud, federal regulators on Friday adopted rule changes aimed at choking off potential stock manipulation before ordinary investors lose money in such schemes.
The Securities and Exchange Commission will continue to make its enforcement actions against small-stock fraud a top priority, SEC officials said at an open meeting. The new rules are designed to supplement that effort by increasing the amount of information on small companies available to investors and making it harder for people to fraudulently promote stocks.Under the changes, for example, small companies will be required to disclose more information when they issue stock under special rules allowing them to do so without registering with the SEC.
Many of the fraudulent promotion schemes involve a practice known as "pump and dump," in which promoters push up a stock's price by making false claims about the company and later sell their own shares to cash in on the artificially high price.
Some small companies have improperly paid consultants, in cash or shares of their stock, to promote the stock. Under the changes adopted Friday, companies won't be able to sell their stock to public investors through consultants who are improperly compensated by the companies.
Cheap, high-risk stocks, often called penny stocks or microcap stocks, are usually traded legitimately but have become a breeding ground for fraud in recent years. The stocks often are thinly traded and the companies issuing them sometimes have minimal assets or none at all, making them only corporate shells.
The SEC has warned investors to avoid being taken in by sales pitches for penny stocks, especially those making exaggerated promises of big returns. Pitches are made by telephone, in television, radio or newspaper ads or on the Internet.
"Stock manipulation schemes provide the means to cheat investors out of their life savings," SEC Chairman Arthur Levitt said before the vote. "The best, most effective protection an investor can provide for himself is awareness. ... Investors have got to be the front line in protecting themselves."
The SEC also issued a new investor education brochure titled "Microcap Stock: A Guide for Investors." The brochure, which offers tips on how to detect and avoid small-stock fraud, is available on the agency's Web site at www.sec.gov and by calling 1-800-SEC-0330.
The agency's rule changes "will be important weapons in the war against microcap stock fraud, which costs unsuspecting investors millions and millions of dollars a year," said Marc Beauchamp, spokesman for the North American Securities Administrators Association, which represents state securities regulators.
"Investors always have to do their homework, but they really have to sharpen their pencils" to avoid small-stock fraud, Beauchamp said.
In a related action, the SEC announced it had filed a civil suit against Glittergrove Investments Ltd., a firm based in Ireland, for allegedly selling stock in two small U.S. companies without registering the stock as required.
The SEC recently suspended for 10 days trading in shares of the two companies, Citron Inc. and Electronic Transfer Associates Inc., citing questions about the accuracy of the companies' public statements. A federal judge in New York City issued an order freezing $2.5 million in Glittergrove's proceeds from the stock sales.
Such trading suspensions are a "very effective tool" in fighting small-stock manipulation, SEC Enforcement Director Richard Walker said at the meeting.
Glittergrove officials couldn't be reached for comment Friday afternoon.
The SEC last year made an anti-fraud "sweep" of several brokerage firms that specialized in small-company stocks, confiscating brokers' telephone sales scripts showing evidence of high-pressure tactics. More than 40 people were charged and convicted under criminal laws and several such "boiler room" sales operations were shut down.
The SEC's enforcement staff also cracked down on investment fraud in cyberspace, taking civil actions against people promoting small-company stocks who didn't disclose they were paid to do so.
The SEC commissioners voted 4-0 to adopt the rules, which will take effect 30 days after being published in the Federal Register.